Top Strategist Shrugs Off 'Magnificent 7' Concentration Risks: 'Stock Market Has Held Up Just Fine...When Mega-Cap Stocks Started To Wane'

Investors should not be overly concerned about the significant concentration of mega-cap tech stocks, according to a top strategist.

What Happened: Brian Belski, the chief investment strategist at BMO Capital Markets, believes that the current market risk due to the dominance of mega-cap tech stocks is being overestimated. He stated in a note on Tuesday that the risk is not as severe as some might think, reported Business Insider.

The “Magnificent 7” mega-cap tech stocks, including Apple Inc AAPL, Microsoft Corp MSFT, Alphabet Inc GOOGL GOOG, Amazon.com Inc AMZN, Meta Platforms Inc META, NVIDIA Corp NVDA, and Tesla Inc TSLA, currently account for 29% of the S&P 500.

Although a potential decline in demand for these stocks poses a risk, Belski is confident that the broader market can still yield positive returns even if the mega-cap tech stocks falter.

“Our work shows that the stock market has held up just fine in prior periods when the outperformance of mega-cap stocks started to wane,” Belski said.

“In fact, the only period where the index posted a loss occurred in 2001 (Tech Bubble), and as we mentioned quite frequently in recent reports, we do not consider that to be a comparable period despite some recent chatter to the contrary,” Belski said.

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He pointed out that the stock market has historically performed well when the mega-cap stocks’ outperformance has started to wane. He also noted that a 10% correction in the second year of a bull market is typical and should not deter investors.

From a valuation perspective, Belski believes that the other 490 stocks in the S&P 500 are trading just slightly above their long-term average price-to-earnings ratio. Their earnings also seem to have bottomed in 2023 and are now improving.

Why It Matters: Belski’s comments come amid a bullish market sentiment. On Wednesday, the S&P 500 surged to an intraday high of 4,995 points, driven by robust corporate earnings. The “Magnificent Seven” tech stocks, including Apple, Microsoft, and Alphabet, collectively exceeded a market capitalization of $13 trillion, underscoring their dominant market presence.

Earlier, Belski had predicted a strong performance for the stock market in 2024, even in the face of a potential recession. He set a 2024 year-end S&P 500 price target of 5,100, signaling a potential 12% upside from present levels, driven by factors such as declining inflation, a robust job market, and climbing corporate earnings.

Meanwhile, Fundstrat’s Head of Research, Tom Lee, has also been bullish on the stock market’s strength in 2024, despite concerns about corporate earnings and the timing of Fed rate hikes. The Fed’s recent meeting suggested no imminent rate cuts until inflation is under control, a sentiment echoed by Fed Chair Jerome Powell.

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