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Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla jointly led the market recovery in 2023 and rescued investors from the aftermath of a difficult 2022. Amid economic uncertainty and market volatility, these seven stocks, led by financial institutions, have emerged as saviors. Guru Aswath Damodaran calls them the “Magnificent Seven” or, as he prefers, the “Seven Samurai” of the market.
In his blog, Damodaran highlighted the performance of these seven stocks in 2023 and their contribution to market growth.
The Seven Samurai, as Damodaran aptly named them, saw their market capitalization soar by $5.1 trillion in 2023. Nvidia and Meta were the top performers, with the chipmaker more than tripling in value. Microsoft and Apple each added $1 trillion in market capitalization this year, solidifying their positions as key players in the market’s resurgence.
These companies accounted for more than 50% of the total increase in U.S. stock market capitalization, resulting in a year with a staggering 23.25% price increase compared to previous years.
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These seven stocks have been outperforming for over a decade. Damodaran said the company’s cumulative market capitalization will jump from $1.1 trillion in 2012 to $12 trillion in 2023, accounting for 24.51% of the total U.S. market cap (previously it was 7.97%). emphasized.
Damodaran pointed out that the market capitalization of Mag7 companies is now larger than all listed stocks in China, making it the world’s second-largest market by market capitalization.
Furthermore, he estimated that the cumulative amount of $100 invested in a capitalization-weighted index of US stocks as of the end of 2023 in December 2012 was invested first in US stocks and then in US stocks excluding Mag7 stocks.
They found that removing seven stocks from a portfolio of 6,658 U.S. stocks invested between 2012 and 2023 resulted in a 17.97% shortfall in terminal value.
“Effectively, a portfolio without any of these seven stocks over the past 10 years suggests it was facing a rally too steep, and perhaps insurmountable, to beat the market.” may go a long way toward explaining why both the value and small-cap premiums essentially disappeared during this period,” Damodaran wrote.
Also read: S&P 500 closes below 5,000 after recent rally
The valuation guru also took a closer look at the factors driving up these Seven Samurai stock prices.
The correction/momentum story is that the company’s impressive 2023 performance was a rebound from the losses it suffered in 2022, when it lost a total of $4.8 trillion in market capitalization, and 2023 saw it lose just a fraction of its year-end value. This suggests that the correction has been revised to a higher level. 2021.
However, the data shows that the outperformance goes beyond a simple correction, with strong profitability and operating results being the main drivers.
Damodaran said these companies demonstrated pricing power, demonstrated economic resilience, acted as money machines and delivered high returns. With debt levels kept to a minimum, the ability to weather economic uncertainty and maintain a safety buffer boosted investor confidence.
“Winner-take-all economics” also played an important role, reflecting the transition from a manufacturing industry to a technology-driven global economy.
“While there was clearly a recovery effect as these companies recovered from a severe blow in 2022, that recovery occurred solely because they were able to achieve strong profits and solid cash flow.” It is arguable that over the course of the year, investors not only bought into the dominant player narrative (derived from winner-take-all economics), but also anointed these seven companies as competitive leaders. I don’t think so. Each has an advantage in its business,” Damodaran wrote.
Also read: Markets may be too optimistic about Fed rate cut prospects
However, while he acknowledges the Seven Samurai’s past glory, he emphasizes the importance of evaluating their current investment attractiveness.
He said Mag7 shares trade at a premium to the rest of the S&P 500 on every price metric, and that’s where the weakest point in pricing lies. The premium can be justified by pointing to Mag7 stock’s high growth rate and profit margin, but there will be a lot of hand-waving as how much premium is at stake. become.
“Mag7 stock is in great shape, but I think the current share price reflects the fact that they are a great company with a business model that delivers massive growth with profitability,” he said. Ta.
The Mag Seven (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, Tesla) have reshaped the market landscape, but investors should be careful when navigating the current premium pricing scenario. The future remains uncertain and, as Damodaran wisely points out, even the best companies can disappoint, reinforcing the need for prudent investment strategies.
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Disclaimer: The views and recommendations above are those of individual analysts or brokerages and not of Mint. We recommend checking with a certified professional before making any investment decisions.
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