Top Hedge Fund Bridgewater Associates has questioned the widespread notion that the ‘Magnificent Seven’ stocks are overvalued, while the rest of the S&P 500 stocks are comparatively undervalued.
What Happened: Bridgewater’s co-chief investment officer, Karen Karniol-Tambour, offers a contrasting viewpoint to the Goldman Sachs data according to which the top 10 companies in the index are trading at 27x their projected earnings over the next 12 months, compared to 20x for the remaining ones on the S&P 500, reported Market Watch on Thursday.
According to Tambour, the ‘Magnificent Seven’ — Apple Inc. AAPL, Amazon.com Inc. AMZN, Alphabet Inc. GOOGL GOOG, Meta Platforms Inc. META, Microsoft Corporation MSFT, Nvidia Corporation NVDA, and Tesla Inc. TSLA — need to grow earnings per share by 14% annually over the next decade to generate a standard risk premium over bonds. This target is lower than their recent 20% growth rate.
On the other hand, the remaining tech sector and the other 55% of the S&P 500, excluding tech, must grow their earnings per share by 8% annually over the next decade to achieve a standard risk premium. Karniol-Tambour suggests that although the ‘Magnificent Seven’ may appear expensive in absolute terms, their valuation is actually below a fair price if they sustain a 20% earnings growth rate.
“For the rest of the S&P 500, while in isolation their valuations may appear ‘cheap,' in actuality one would need to believe their growth will accelerate to justify paying current prices," believes the co-chief investment office. Karniol-Tambour also pointed out that historically, stock markets have performed well when heavily concentrated at the top, as they are now. However, this concentration is risky for portfolio diversification, she added.
Why It Matters: Karniol-Tambour’s analysis comes at a point when most analysts are expressing concerns over the high valuation of the shares of ‘Mag 7.’ CEO of Trivariate Research, Adam Parker feels that these stocks are risky and overvalued and suggests investors to trim their exposure to these tech companies. He also cautioned that the overly optimistic bullish sentiment may no longer reflect the actual market conditions.
Most of the Mag 7 shares have been underperforming in recent times. Also, Chinese tech stocks, led by DeepSeek, have been rising, closing the valuation gap with the U.S. ‘Magnificent Seven.’ Meanwhile, John White, founder of hedge fund Calibrate Partners, told Bloomberg that there are a lot of attractive undervalued opportunities in Europe when compared to the U.S. markets, particularly following the recent news of Elliott acquiring a stake in BP.
Despite AI-driven sell-offs in the tech sector, Meta Platforms Inc. has been outperforming the ‘Magnificent Seven’ with its sustained winning streak.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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