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Too much of the Magnificent Seven in our ISAs?
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Tom 123
Posted: 14 February 2025 13:40:25(UTC)
#62

Joined: 13/09/2016(UTC)
Posts: 1,606
smg8;334374 wrote:


The biggest stocks in the index today look very different from those 50 years ago, yet we haven’t had 50 years of negative returns to get here.



Most / all investors here don't have a 50 year timeline.

In the past 50 years we have had years / decade's of zero to negative growth.

In the 70s the US market was negative in real terms. In the post 2000 decade, growth was negative in real terms.

https://ofdollarsanddata.com/sp500-calculator/

Despite all the who ha about how great the US market is last 2 years (since it bottomed), its produced a negative real return since the 2021 peak.

WIth P/Es at max, no expansion can come from that function. If you look at the 2011-2022 period most of the mag 7 were on lower P/Es than now.

Divis? negligible. No growth there.

Earnings growth? mixed bag depending on which Mag7 you look at.

I just dont see any of the three long term equity drivers as looking great.

In all previous lean decades, the empirical evidence suggests a value tilt has been the best place to be.
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Newbie
Posted: 14 February 2025 13:44:53(UTC)
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smg8;334374 wrote:
Tom 123;334355 wrote:
What I would like to understand (from those bullish on the Mag7), is where does it go from here?




I’m not making a bullish case for the M7 - honestly, I have no idea whether they’re fairly valued, overvalued, or undervalued.

What I do know is that if one of them drops out of the M7, something else will take its place - just as we’ve seen with past iterations of these market-dominating groups, just as something came and replaced Netflix.

The biggest stocks in the index today look very different from those 50 years ago, yet we haven’t had 50 years of negative returns to get here.

Some of these companies may grow earnings and justify their valuations. Others may not and will decline in value (like Meta/Facebook when it shrunk to being on a PE ratio of 13).

Maybe in the future, Visa, JPMorgan, Bank of America, and Mastercard dominate, and we’ll be debating whether global indices led by the M4 have too much financials exposure.

I broadly agree that multiple expansion has been a major driver of equity performance with specific stocks, and I’ve made that argument myself. If earnings growth continues to outpace expectations, great. If not, valuations may compress, and share prices will suffer.

That said, I’d still expect global equities trading at 18x earnings to outperform, say, Russian or Greek equities at single-digit multiples over my investment timeframe. Valuations matter, but so does long-term structural growth.

Those are some of the reasons why I have and building on my position of L&G Global 100.
The managers will (hopefully) re-align the portfolio in due course.
Tesla was a speck then became big and admitted to S&P and will go away again.
Recently Palantir got accepted but will no doubt go away again.
So the choice is between Global index and Global 100.
Why not both ?
The difference is that only some of the smaller guys makes it big whereas the larger ones stay around the top a bit longer - momentum, craze, index allocation and all that.
It is also a bit different to the UK where the top generally stay there - probably due to lack of dynamism, innovation or simple, lack of companies.
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Moose on 16/02/2025(UTC)
smg8
Posted: 14 February 2025 13:56:59(UTC)
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Tom 123;334377 wrote:


Most / all investors here don't have a 50 year timeline.

In the 70s the US market was negative in real terms. In the post 2000 decade, growth was negative in real terms.

Despite all the who ha about how great the US market is....



Most / all investors here don't have exposure solely to the US....it's a moot point.


Tom 123;334377 wrote:


WIth P/Es at max, no expansion can come from that function.



Is that true? As in it's not physically possible for PE's to go up any further?



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8 users thanked smg8 for this post.
wydffart on 14/02/2025(UTC), You have to change your life on 14/02/2025(UTC), Guest on 14/02/2025(UTC), Newbie on 14/02/2025(UTC), Jay P on 14/02/2025(UTC), Jesse M on 14/02/2025(UTC), stephen_s on 14/02/2025(UTC), bearcub on 15/02/2025(UTC)
You have to change your life
Posted: 14 February 2025 16:02:00(UTC)
#66

Joined: 17/11/2021(UTC)
Posts: 2,194
Tom 123;334355 wrote:



Most investors think share prices rise in line with earnings growth. .



Well. Right there.

It wasn't that analysts back then saw a target you could not hit. They were aiming for a target you could not even see.
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You have to change your life
Posted: 14 February 2025 16:20:16(UTC)
#57

Joined: 17/11/2021(UTC)
Posts: 2,194
Rookie Investor;334352 wrote:
The skill comes from analysing the companies to determine if under or over valued.




Go on then.
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Tom 123
Posted: 14 February 2025 16:30:50(UTC)
#64

Joined: 13/09/2016(UTC)
Posts: 1,606
smg8;334382 wrote:



Tom 123;334377 wrote:


WIth P/Es at max, no expansion can come from that function.



Is that true? As in it's not physically possible for PE's to go up any further?





It is possible we get a crack up boom next year or two to those previous P/Es.

Then:

The Tech bubble took 12 years sideways regression.
The Nasdaq bubble took 25+ years.
The Nifty Fifty took 10-20 years to recover.

Nifty Fifty is closest to today's situation.

However you cut it's expensive. Expensive has always led to years of underperformance.
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Guest on 14/02/2025(UTC)
Tom 123
Posted: 15 February 2025 17:25:09(UTC)
#68

Joined: 13/09/2016(UTC)
Posts: 1,606
Various comparisons out there.

I would say this is the fourth great bubble:

https://www.visualcapita...ock-market-overheating/

On a CAPE basis similar to the past three great bubbles all of which preceded large crashes.

Its all on earnings growth from here. That needs to hold up to prevent change in P/E moving downwards. Potentially we could achieve a permanently high plateau in stock prices as earnings growth brings P/Es down. Would be the first time ever, but you never know.
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Rookie Investor
Posted: 15 February 2025 17:52:35(UTC)
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Tom 123 - did you know that what constitutes earnings has changed over the years/decades? In the past, companies had more tangibles vs. intangibles, and so by definition the tangibles are capitalized such that the income statement does not show a large drop in earnings on day 1 of the investment.

Whereas in today;s world, where we have a hell of a lot more intangibles vs tangibles, compared to previously, things like R&D are all expensed on day 1 of the expense having occurred.

This results in PE ratios being higher today than in previous years/decades, than otherwise would be, and the earnings coming later due to operating leverage, which might justify the higher initial PEs.

Something to think about.
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Raj K on 15/02/2025(UTC)
Newbie
Posted: 15 February 2025 17:56:13(UTC)
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Tom 123;334586 wrote:
Various comparisons out there.

I would say this is the fourth great bubble:

https://www.visualcapita...ock-market-overheating/

On a CAPE basis similar to the past three great bubbles all of which preceded large crashes.

Its all on earnings growth from here. That needs to hold up to prevent change in P/E moving downwards. Potentially we could achieve a permanently high plateau in stock prices as earnings growth brings P/Es down. Would be the first time ever, but you never know.

I agree - the coming train wreck is going to be spectacular and is going to happen !
I just believe that it is not this year.
Maybe next.
If not then definitely the year after.

There will be a lot of trading this year and hence why I am loading up on things like - RobinHood, Interactive Brokers, IG Group, AJB - that will benefit from all the frenzy both on the way in and exit.

The companies just below the top 20-30 (in the US will also be a good hunting ground.

However the Mag7 are multiple revenue stream beasts with actual revenue and services which the world consumes. They are also the incubators of the tail end companies from whom they are benefiting in the hype and frenzy leading to the wreck. It also also allowing them to retain and deter future competition in house just look at SoundHound - Nvidia incubated them and rode the share price up until last week when they dumped it (the stock fell 30% in a day on that news).

Nancy Pelosi bought Tempus AI and now the hedge funds are buying like crazy (everyone likes to buy what Nancy buys) - by the next 13F she may well be out. Some other congress member has recently been loading up on Barclays and that share is riding. So, yes there is a bit of a frenzy out there and yes there will be a bloodbath.

Back to the mag 7, they all reported great earnings - but the shares have remained flat. In fact take Nvidia, the share price today is the same as it was in June 2024 but somehow it was OK to buy in June 2024 but not now after the earning and events - why is that ?

Some things like Apple and MSFT do look fair value and better opportunities lie elsewhere but a company like Apple just does not seem to want to be buried YET!.
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Jay P on 15/02/2025(UTC), Guest on 16/02/2025(UTC)
Harry Gloom
Posted: 15 February 2025 18:09:19(UTC)
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Tom 123;334586 wrote:
Various comparisons out there.

I would say this is the fourth great bubble:

https://www.visualcapita...ock-market-overheating/

On a CAPE basis similar to the past three great bubbles all of which preceded large crashes.

Its all on earnings growth from here. That needs to hold up to prevent change in P/E moving downwards. Potentially we could achieve a permanently high plateau in stock prices as earnings growth brings P/Es down. Would be the first time ever, but you never know.



So, what are you doing about it? Can you avoid the crash or limit the downside without affecting the long term upside?

Would love to compare notes from now and 10 years out.
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Newbie on 15/02/2025(UTC)
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