The S&P 500 index has never been more weighty. The “Big Seven” tech stocks — Apple (AAPL.US), Alphabet (GOOGL.US), Microsoft (MSFT.US), Amazon (AMZN.US), Meta (META.US), Tesla (TSLA.US), and Nvidia (NVDA.US) — account for 29% of the total market value of the S&P 500 Index.

The “2024 US Stock Market Outlook” chart released by Goldman Sachs shows that this is the largest share in the market value of the S&P 500 index in history, dominated by 7 stocks. This view helps explain Goldman Sachs's second chart: the “Big Seven” rose 71%, while the other 493 stocks only rose 6%. Considering the market value distribution of the S&P 500 index (that is, large-cap stocks contribute more to the trend of the index), the index has risen about 19% this year.

The stock research team led by David Kostin, chief stock strategist at Goldman Sachs in the US, described the outstanding performance of the “Magnificent Big Seven” as “a decisive characteristic of the 2023 stock market.” Maybe it's reasonable to do that. Two other charts in the Goldman Sachs outlook report show that the “Big Seven” outperformed the other 493 stocks on key indicators that usually influence stock market performance.

From 2013 to 2019, the “Big Seven” stocks had a compound annual growth rate of 15%, while other stocks had a compound annual growth rate of 2%. However, the gap between the two has narrowed to 18% and 15% respectively in the past two years, but Goldman Sachs expects this gap to widen again in the next few years. Goldman Sachs expects that from 2023 to 2025, the “Magnificent Seven” will have a compound annual growth rate of 11%, while the compound annual growth rate of the other constituent stocks of the S&P 500 index will be 3%.

The net profit margin of the “Magnificent Seven” also performed well, with a profit margin of 19% higher than that of other companies of 9.8%. Not to mention, these seven companies are expected to see long-term earnings per share growth of 17%, while the rest of the index have this figure of 9%. Kostin said, “Strong realized sales growth, higher expectations, links to artificial intelligence themes, and rising valuations all explain this slight increase. These seven companies currently account for 29% of the total market value of the S&P 500 index, with a cumulative return of 71% to date. The remaining 493 stocks in the index had returns of only 6%.”

Kostin wrote: “From a fundamental point of view, recent profit trajectories explain the performance of these seven companies compared to other companies in the market. While the “Big Seven” performed well this year, the rebound in profit margins and profits surpassed the weakness in other sectors of the market. The market generally expects that the 'Big Seven Magnification' will continue to grow faster than the other constituent stocks of the index.”

Goldman Sachs believes that the “Magnificent Seven” stock may also rise in the future, but given the stock's rise last year, this does not mean that it is an ideal trade for 2024. Kostin stated: “Our benchmark forecast shows that large technology stocks will continue to outperform the other components of the S&P 500 Index in 2024, but given the rising expectations, the risk/reward profile of this transaction is not particularly attractive. Compared with 493 other stocks, the expected sales growth in 2023-2025 (11% vs. 3%), 2023 profit margin (22% vs. 10%), and reinvestment ratio (61% vs. 18%) of these 7 stocks are all faster than the other 493 stocks. After considering the expected growth (0.9 times compared to PEG), their relative valuations are consistent with the recent average. However, given the higher expectations, the risk/reward of this type of trade is not particularly appealing. The rise in hedge fund ownership and the potential shift in enthusiasm for artificial intelligence are two major risks facing large technology stocks.”