Magnificent 7 Lead S&P, Hold 53% Corporate Cash

Key Takeaway

• The "Magnificent Seven" large US firms dominate the S&P 500, accounting for 27% of its market cap, bolstered by pandemic policies and tech advancements.
• These leading companies are out-investing and out-earning smaller rivals, holding 53% of the S&P's corporate cash, making them less vulnerable to financial shocks.
• Despite a mild overall bull market compared to historical norms, large-cap stocks' performance is significantly outpacing that of smaller companies.

Dominance of the Magnificent Seven

The "Magnificent Seven," a group of the largest firms including Nvidia, Apple, and Amazon, are extending their lead over smaller companies in the US. This widening gap is attributed to several factors such as the massive loosening of monetary policy during the pandemic, the largest ever pro-cyclical deficit run by the US, the shift to mass working-from-home, companies leveraging pandemic disruptions to increase margins, and the AI boom initiated by ChatGPT. These firms now account for 27% of the S&P 500’s market cap, a concentration never seen before in large-cap indexes in the US, highlighting their unbeatable position and the challenges smaller companies face in catching up.

Earnings and Investment Surge

The largest 50 firms in the S&P 500 are not only outperforming in terms of market cap but also in earnings, accounting for 35% of the index’s total Ebitda. Their Ebitda has increased over 3.5 times since 2020, compared to a doubling for the smallest 250 companies. This financial strength allows them to invest heavily in future technologies like GPU chips, data centers, and energy production, further solidifying their dominance across the economy. Their cash positions have also grown significantly, with the top 50 companies holding 53% of the index’s total corporate cash, compared to only 8% for the smallest 250.

Financial Resilience and Stock Buybacks

The largest firms have shown greater resilience to rising interest rates, with their earnings covering their interest expenses 25 times over, versus only six times for smaller companies. This financial stability is enhanced by their substantial cash reserves, making them less vulnerable to debt downgrades and better positioned to handle unexpected financial shocks. Additionally, these firms are accelerating their earnings to buy back more of their stock, further boosting their share prices and leaving smaller companies behind in terms of financial maneuverability and market performance.