Reality Meets Expectation for the Mag 7
Expecting the Magnificent 7 to continue their strong returns assumes they continue to exceed increasingly lofty earnings expectations.
It is unlikely any stock has an expected return of 100% per year. That seems too high to be the cost of equity capital for a company, and it’s doubtful anyone would sell a stock with an expected return 10 times the historical stock market return.1 A realized return that big likely means the company surprised investors in a good way.
The Magnificent 7 stocks returned on average more than 111% in 2023, exceeding the S&P 500 Index by over 85 percentage points. While it’s hard to say what cash flow expectations were built into their stock prices, comparing analyst earnings estimates to actual earnings suggests these companies exceeded expectations for the year. All seven reported earnings exceeding average forecasts. For example, Nvidia posted an earnings per share 37.4% higher than the average analyst expectation. Contrast this with 2022, when five of the seven companies’ earnings fell short of analyst expectations. The average Magnificent 7 stock return that year trailed the S&P 500 Index by 28 percentage points.
Expecting Mag 7 outperformance to continue is to bet on these companies further exceeding the market’s expectations. Simply meeting expectations may result in returns more in line with the market, consistent with the history of top US stocks.
EXHIBIT 1
Surprise, Surprise
Magnificent 7 actual vs. analyst forecast earnings per share, 2022–2023
FOOTNOTES
1. The S&P 500 Index had an annualized return of 10.3% from January 1926 to December 2023. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
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