MW Magnificent Seven stocks may be cheap and the S&P 493 expensive, Bridgewater says. Here's why.

By Steve Goldstein

The Magnificent Seven companies are fairly valued if they grow at a rate of 14% per year, according to Bridgewater's calculations

It's generally accepted that the megacap stocks known as the Magnificent Seven are expensive and the remaining 493 stocks in the S&P 500 are not very pricey.

That's understandable. Data from Goldman Sachs through the end of 2024 show that the index's top 10 companies trade on 27 times forecasted earnings over the next 12 months, compared with just 20 times for the rest of the S&P 500.

Hedge-fund giant Bridgewater says investors may want to look at things differently. Here's the logic, as provided by Karen Karniol-Tambour, Bridgewater's co-chief investment officer.

The Magnificent Seven - Apple $(AAPL)$, Amazon.com $(AMZN)$, Alphabet $(GOOGL)$, Meta Platforms $(META)$, Microsoft $(MSFT)$, Nvidia $(NVDA)$ and Tesla $(TSLA)$ - need to grow earnings per share by 14% per year over the next decade to earn a normal risk premium over bonds, which is a lower bar than the 20% they have achieved recently.

The rest of the tech sector also needs to grow earnings that quickly, but they have grown only 4% per year over the last decade, according to Bridgewater calculations.

The other 55% of the S&P 500, outside of tech, needs to collectively grow earnings per share by 8% per year for the next 10 years to earn a normal risk premium, which is lower than the half of the market represented by the Magnificent Seven and the rest of tech, but higher than the 5% the other companies have achieved in the past, she says.

"While the Mag 7's valuations are high in absolute terms (double-digit discounted EPS growth to earn a normal risk premium), this is actually lower than what we think a fair price would be if they continue growing earnings at 20%. And 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," she said.

Karniol-Tambour also noted that historically, stock markets have done well when concentrated at the top like they are now, although that concentration poses portfolio-diversification risk. The 1950s and 1960s also had highly concentrated stock markets, a period when they did well.

The S&P 500 SPX has gained 21% over the last 52 weeks, while the equal-weight version RSP has added 12%.

-Steve Goldstein

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February 13, 2025 10:17 ET (15:17 GMT)

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