Jakob Westh Christensen, Market Analyst at eToro, said: “The strong gains among the 'Magnificent 7' stocks have resulted in these seven stocks now making up c. 30% of the S&P 500 market value. This results in natural concentration risk for the market and in many investors' portfolios. With the tech-giants already high margins and 'pricy' valuations, the upside for this part of the market could also be limited from here. Keeping in mind that this comes after an aggressive bull run that has lasted more than one and half years, and a continuation at the same pace seems unsustainable.
While the tech-giants gains so far have been supported by strong earnings growth, there starts being signs of earnings growth slowdown. For example, the earnings growth for the 'Magnificent 7' is expected to slow to 29% in the second quarter of 2024, compared to an average of 35% in 2023. Meanwhile, the remaining 493 stocks in the index are finally set to witness an earnings recovery pickup, starting with a 5% growth during the ongoing earnings season.
I remain optimistic about the resilience of the tech sector. However, for those investors already heavily invested in this sector, it could be worth considering reducing the concentration risk by investing in another part of the market.”
