The stock market is experiencing a lopsided scenario, where seven tech giants, known as the “Magnificent Seven,” dominate one side while all other companies are left on the other side. Richard Bernstein Advisors (RBA) sees this as a unique opportunity for investors, except for those focused on the seven companies.
The Overwhelming Influence of the Magnificent Seven
The Magnificent Seven are Apple, Amazon.com, Google parent Alphabet, Facebook parent Meta Platforms, Microsoft, Nvidia, and Tesla. These tech giants have played a significant role in this year’s stock market rally. While the S&P 500 has delivered total returns of over 13% this year, if we exclude the seven stocks, the index remains fairly flat.
Most investors are drawn to the high-flying performance of these seven stocks, as noted by RBA. However, RBA’s portfolios take a decidedly different approach, positioning themselves on the opposite end of the spectrum.
Seeking Opportunities Beyond the Magnificent Seven
Richard Bernstein, RBA’s CEO and chief investment officer, insists that the popularity of the Magnificent Seven stems primarily from their stock price appreciation rather than any solid fundamental reasons. RBA’s contrary approach is driven by a belief that there are untapped opportunities elsewhere.
While Bernstein jokingly claims to favor anything that’s not part of the Magnificent Seven, he acknowledges that there are exceptions. Nevertheless, he firmly believes that the market offers opportunities beyond these tech giants.
The Rationality Behind Narrow Markets
According to RBA’s research, narrow markets are usually justified when growth is scarce or during a profits recession. In such times, investors naturally gravitate towards a limited number of companies capable of substantial growth. This rationale could explain the narrow leadership of the Magnificent Seven. However, the problem lies in the fact that growth is not scarce at present.
In fact, RBA notes that corporate profits are on the rise, and the overall economy appears to be in good health. With more than $15 billion in assets under management, RBA utilizes global macro-based strategies, primarily investing in exchange-traded funds (ETFs).
Unearthing Growth Opportunities
RBA conducted a screening process to identify U.S. companies with earnings growth of 25% or more. Surprisingly, over 130 companies passed the screen, but only one of them belonged to the Magnificent Seven, ranking a modest 111th.
While the Magnificent Seven continue to dominate the stock market, Richard Bernstein Advisors sees immense potential beyond these tech giants. With a different approach and a belief in the broader market’s opportunities, RBA aims to unearth growth prospects that may have gone unnoticed.
The prevailing belief is that “there is nothing particularly magnificent about the Magnificent Seven,” as stated by the firm. This narrow leadership, coupled with their inflated valuations, suggests an enticing opportunity in practically any other stock, except for these seven.
According to RBA, the Magnificent Seven currently boast an average price-to-earnings ratio of 41, while the equal-weighted S&P 500 stands at 15. It has been well-documented that long-term returns are heavily influenced by valuation, which is why it’s ill-advised to pay Bentley prices for Volkswagens, as Bernstein often reminds us.
When comparing the big seven tech stocks to smaller cap stocks, the rest of the world, and emerging markets, it becomes evident that they are overpriced. In fact, virtually everything else on the market appears more reasonably priced in comparison to these seven stocks. This concerning situation raises the possibility of a lost decade for equities, as these seven stocks make up a significant chunk of the index.
RBA’s flagship strategy, the $7.1 billion Global Risk-Balanced Moderate ETF Strategy, takes an innovative approach by utilizing a blended benchmark that incorporates the MSCI ACWI Index for its stock portfolio. This strategy is overweight in non-tech cyclical stocks, particularly in industrials, energy, and materials.
Bernstein argues that the profit cycle is inherently influenced by cyclical stocks. Stable growth may seem appealing, but when the profit cycle slows down, exposure to cyclical stocks becomes less desirable. Conversely, when the profit cycle heats up, cyclical exposure becomes advantageous.
One key aspect of RBA’s strategy is an overweight position in non-U.S. stocks. Bernstein expresses his fondness for Canada, China, Europe, and Japan, as he believes these regions offer ample opportunities. This sentiment is driven by the revving up of profitability in these areas, combined with their undervalued assets that are currently shunned by the general investing community.
In conclusion, the Magnificent Seven may not be as magnificent as they appear, making it imperative for investors to explore alternative opportunities. RBA’s Global Risk-Balanced Moderate ETF Strategy presents a compelling option, with its focus on non-tech cyclical stocks and overweight position in non-U.S. markets. This well-balanced strategy aims to capitalize on the revving up of profitability and the perception of cheap assets, which are often disregarded by mainstream investors.