Magnificent Seven lose $2.3 trillion of valuation amid summer market slide

• NASDAQ only back to where it was in May (but is a mere 5% above November 2021's levels)
• Magnificent Seven's combined market cap has lost $2.3 trillion since July's peak
• The septet still represents a third of the S&P 500's total valuation and one fifth of global stock market value on their own
• A lot of froth blown off but investors still have to decide whether such top-heavy markets are healthy (or not)

"There are two ways of looking at the summer stock market stumble. Bulls will see it as a hiatus and no more during the traditionally stale period where major players sell in May and go away, returning on St. Leger Day in September, while bears will argue this is the start of a long overdue reckoning for markets where buybacks, borrowing on margin (or in yen) and central bank largesse are providing liquidity to overvalued, overhyped risk-on assets," says AJ Bell investment director Russ Mould. "The fight is on. Bulls will note without undue concern that the aggregate stock market valuation of the Magnificent Seven is only back to where it was in June and the NASDAQ is at levels seen as recently as late May. Bears will say that someone, somewhere has lost $2.3 trillion on the Mag7 since May, while the NASDAQ is just 5% above where it was in November 2021, before the AI hype machine moved into top gear.

"Either way, a lot of froth has been blown off the top and some will see this as a healthy (if apparently unexpected) correction, others as the start of something altogether nastier.

"The slide that started in July does leave the NASDAQ not much higher than late 2021, which may be an unpleasant surprise to many investors, especially if they are using index-trackers and exchange-traded funds to glean their stock market exposure. These passive instruments will have followed the technology-laden American index straight up and now straight down into correction territory as the NASDAQ is more than 10% off its high.

Source: LSEG Refinitiv data

"The combined valuation of the Mag7 is still $14.7 trillion, down from July's $17 trillion peak. That is a quick-fire 15% slide, and it will be interesting to see if it tests the resolution of bulls of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

"True believers are likely to see it as little more than the usual market rough and tumble. Those whose guiding light is valuation may be wondering whether this is the start of a major correction to match the one seen in 2022-23 (when interest rates started to rise), given the vertiginous rise in the seven names' total price tag and the fact that they still represent nearly 33% of the S&P 500's total valuation. Prior examples of markets that rely so heavily on so few names are relatively scarce and while the party on the way up in the so-called 'go-go' years of the late 1960s (when US tech stocks dominated), the early 1970s (the Nifty Fifty) and the late 1990s (tech stocks again) was great, the hangover on the way down was truly awful.

Source: LSEG Refinitiv data

"In this context, it is intriguing to see how just two of the Magnificent Seven are now in the top fifty in the S&P 500 this year in terms of their share price performance, so perhaps their valuations are starting to weigh heavily - although supporters will cast that aside by saying six of the seven are still offering healthy gains and that Nvidia is still the best performer of all this year so far.

Source: Sharepad, LSEG Refinitiv data. *As of the close on 2 August 2024

"Any fears of a lop-sided US equity market could yet spill over globally, though. The S&P 500 represents 61% of the combined market valuation of the FTSE All-World index's 3,700-odd members. The last time the US represented such a big chunk of global market value was 2000, right at the peak of the technology, media and telecoms bubble - and that burst shortly afterwards."

Source: LSEG Refinitiv data