INVESTMENTS & PENSIONS
THE MAGNIFICENT SEVEN
Throughout 2023 , global equity markets were dominated by the strong performance of a group of US stocks called the ‘ Magnificent Seven ’. These companies are , broadly speaking , deemed to be beneficiaries of generative Artificial Intelligence ( AI ). Investors piled into these stocks , lured by the hope of large earnings growth . The strong performance of their share prices has led some commentators to suggest that these companies ’ shares now look expensive . Furthermore , because of the strength of this group ’ s recent performance , the US equity market has become significantly more concentrated , with the top ten stocks in the S & P 500 index by market capitalisation now constituting nearly a third of the index . While we still believe some of these companies will continue to benefit from secular growth drivers such as AI , other areas of the US equity market currently appear attractively valued historically and on a relative basis , specifically within the small and mid-capitalisation ( SMID ) names .
AN ATTRACTIVE BUYING OPPORTUNITY
Over the longer term , SMID companies have historically outperformed larger companies . There are several reasons for this . Their size makes them nimble , they can often achieve higher growth rates , and they are also more likely to be subject to merger and acquisition activity ( although this is not generally a reason to buy them ). For these reasons , historically , they have tended to trade on a premium ( as measured by the price-to-earnings ratio ) compared to large and mega-capitalised ( large and mega-cap ) stocks , as shown in the graph below . However , for the last three years or so , they have been trading at a discount to large cap companies , which could provide an attractive buying opportunity .
SIZE MATTERS |
Large capitalised companies led recently , but is there now a SMID opportunity ? |
Valuation Multiple |
22 20 18 16 14 |
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Feb-2024
May-2023
Aug-2022
Nov-2021
Feb-2021
May-2020
Aug-2019
Nov-2018
Feb-2018
May-2017
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May-2014
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Calendar Year |
MSCI USA Small Mid - PE - Next 12 months MSCI USA Large Cap - PE - Next 12 months |
Source : FactSet , Data to 28 / 02 / 2024 accessed on 3 / 05 / 2024 Past performance is not a reliable indicator of future results .
The information in this document does not constitute advice or a recommendation and you should not make any investment decisions on the basis advice and independent professional advice should be sought . This document is for the information of the recipient only and should not be reproduc who do not have professional experience in matters relating to investments . Brooks Macdonald Asset Management Limited is regulated by the Finan name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies . Brooks Macdonald Group plc is regi Brooks Macdonald Asset Management ( International ) Limited . Brooks Macdonald Asset Management ( International ) Limited is licensed and regulate its Isle of Man branch is licensed and regulated by the Isle of Man Financial Services Authority . In respect of services provided in the Republic of South Financial Sector Conduct Authority . Registered in Jersey No : 143275 . Registered office : Third Floor , No 1 Grenville Street , St Helier , Jersey , JE2 4UF More
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