Warning for America's Magnificent 7

German banking giant Deutsche Bank has warned that the seven largest companies in the US have now become a macroeconomic phenomenon and that this group of stocks should be evaluated by considering their potential impact on all asset classes. A report published by Deutsche Bank drew attention to the size of the seven largest companies in the US, known as the Magnificent 7, in terms of market value, and stated that the impact of this group of companies has now reached the macroeconomic level and should be evaluated in this context, regardless of direction. The report stated that much of the strong performance observed in the market this year was due to a few large stocks, which is probably not new news for investors, but the extent to which these heavyweights have an impact on the S&P 500 Index deserves a deeper examination. It was even emphasized that the situation may have become a macroeconomic phenomenon at this point. The Magnificent 7, Apple, Alphabet, Amazon.com, Meta Platforms, Microsoft, Nvidia and Tesla, were the main forces that lifted the S&P 500 by more than 5 percent this year after finishing 2023 on a strong note. The investor frenzy in the field of artificial intelligence in particular helped technology companies that are heavily involved in artificial intelligence, such as chipmaker Nvidia and Meta, achieve double-digit percentage increases in just weeks. This concentration of stocks was last seen before the Great Depression. The bank noted that the market value of these stocks increased much faster than the other 493 companies in the S&P, causing the index to be extremely concentrated. On the other hand, according to Deutsche Bank Strategist Jim Reid, who said that we need to look back to the 1929 bubble to find a period when so few stocks had such a high weight in the broader market, the index is currently at its most concentrated in at least the last century. Reid cautions that stock market concentration at these levels is more than an anomaly and requires macroeconomic consideration, given how much the fate of these few companies affects overall sentiment. “There is little doubt that the performance of the Magnificent Seven stocks in recent months and even years has greatly influenced the macro environment. Without their dominance of the market, U.S. stocks and global sentiment would look very different. In turn, their future performance is likely to affect most global assets to some degree, perhaps even to a large extent,” the Deutsche Bank strategist wrote in a note on Tuesday. Total stock value could make up the world’s second-largest national stock exchange The bank notes that the combined market value of the Magnificent Seven could make up the world’s second-largest national stock exchange, twice the size of No. 4 Japan. In addition, Apple, Microsoft, the Saudi Arabian Stock Exchange and the U.K. Stock Exchange have very similar market caps. In addition, experts emphasize that if the Fed continues on the path of monetary policy expected by investors by significantly reducing interest rates this year, the weight of the Magnificent 7 could increase even more, which could make the stock group an even stronger focus. The increase may continue with the Fed's possible interest rate cut The bank emphasized that when bond yields fall, the tendency to turn to the stock market tends to be higher, and stated that the 10-year benchmark US bond yield rose to its highest level since the 2008-09 financial crisis as the Fed saw its peak in interest rate hikes, and is expected to fall as the US Federal Reserve cuts interest rates in the coming months. This situation could increase the market values of the Magnificent 7, which are growth-oriented and whose stock values are determined according to earnings expectations in the coming years, in terms of valuation. Low yields tend to increase the present value of future cash flows, and investors are already predicting that Nvidia's returns, for example, will outperform the broader market. Supportive and compelling factors In its report, Deutsche Bank identified a number of factors that support or challenge the continued growth of the Magnificent 7. The first group includes optimism that this group of stocks has global reach and high innovation power, that its earnings already surpass those of many major countries, that it has the backing of the US, and that artificial intelligence is still in its infancy. The second group includes pessimism about regulatory moves against “Big Tech” and public scrutiny of AI, geopolitical risks, and rapid technological change that could turn against the Magnificent Seven, who are valued as if they will always win. Reid emphasizes that regardless of one’s view on the subject, the macro impact of this group must be taken into account, saying, “Whether you think they continue to be an attractive investment vehicle or believe they are overvalued, one thing is for sure. You cannot ignore the impact of this group of stocks in any asset class.”