Has the Mag 7 flown too close to the sun?

Riddle us this: What makes up roughly a third of the S&P 500, nearly half the Nasdaq 100, and 100% of your recurring nightmares that your children got replaced by robot clones and you can’t tell? It’s the Mag 7, of course.

“We’ve been in a momentum driven market largely led by the Mag 7 and other large tech firms,” CEO of VistaShares Adam Patti recently explained on the Brew Markets podcast. “So everyone was a genius just by investing in the S&P 500…but that’s not the reality of how the market works in most market cycles.”

Investors who think they’re buying broad diversification through passive index funds may actually be making a concentrated bet on a handful of mega-cap tech companies. “This leaves portfolios more exposed to positioning risk, particularly when the next phase of the cycle is likely to introduce new competition for capital,” explained UBS Global Head of Equities Ulrike Hoffmann-Burchardi in a note today.

In the best case scenario, that’s just fine, and you can keep riding the tech bull market. But if there’s a pullback in AI stocks—or even worse, a bubble pop—that could leave many investors far more vulnerable to the damage than they realize. And even if there isn’t a major bubble, investors could just be missing out on other opportunities.

“Investors can address this risk by complementing exposure to market-cap-weighted indices with equal-weighted index approaches,” explained Hoffmann-Burchardi. He also suggested adding exposure to emerging markets in Japan, China, and Switzerland—or, if you want to stick with tech, to look into the “enabling, intelligence, and application layers of the AI value chain, including semiconductors and chipmaking equipment, power and resources, and infrastructure.”

Think bigger than Big Tech

US equities are crushing it this earnings season, thanks in large part to the Mag 7. But analysts across Wall Street are pointing out that earnings are improving beyond just the usual tech names.

“Whereas trends are strongest in Big Tech, the median stock is tracking healthy earnings per share growth of 11% year over year in 1Q, also the highest level since 2021,” explained Bank of America head of US Equity Strategy Savita Subramanian in a research note earlier this week.

Goldman Sachs echoed the sentiment. “S&P 500 year/year EPS growth is tracking at 25%, more than twice the consensus estimate of 12% coming into the season. Much of this strength is attributable to the mega-cap technology stocks,” Chief US equity strategist Ben Snider recently wrote. “However, even excluding those figures, S&P 500 EPS growth would be on pace to register 16% in Q1, the strongest quarterly growth rate since 2021.”

The market may soon be bigger than just Big Tech, so maybe it’s time your portfolio caught up.—LB