The Big Five in African game animals has remained unchanged since the term was first coined—lion, leopard, rhinoceros, elephant, and African buffalo. By contrast, the big five stocks on the S&P 500 have changed dramatically over the past 20 years as the exponential growth of the technology industry has eclipsed capital-intensive industries such as oil and retail.
Back in 2003, the five largest stocks on the S&P500 by market capitalisation were Microsoft, General Electric, Exxon Mobil, Walmart, and Citigroup. Today, the only one of those stocks that remains among the top five (or even 10) is Microsoft, which surfed the early personal computing wave, reinvented itself for the web, and positioned the organisation at the forefront of the cloud and artificial intelligence (AI) revolutions.
Microsoft is today ranked second on the index by market cap, behind only Apple. These two companies each have market capitalisations exceeding two trillion dollars. The rest of the top five is filled out by Amazon (market cap of $1.23 billion at the time of writing), Alphabet ($1.55 trillion) and Nvidia ($996 billion).
These five stocks—along with Tesla ($644 billion) and Meta ($741 billion)—form the so-called Magnificent Seven that played a disproportionately large role in the strong equities market performance we saw in the first half of the year. Market excitement about the potential of AI helped to inflate the stock prices of these companies to record levels.
Indeed, as Ninety One notes in a recent newsletter, the Magnificent Seven has a market capitalisation double the size of stock markets in South Africa, India, Russia, and Brazil combined. But the question increasingly comes up whether earnings can catch up after the stock prices of these Big Tech companies have run so far ahead.
Alphabet, Amazon, Meta, and Microsoft stock prices all slumped last night, despite robust earnings growth. Apple, which was also down, reports results next week. These stock price movements suggest that investors are starting to worry about whether future earnings will justify current valuations (but it’s important to note that uncertainty in the Middle East and other factors are also weighing on markets).
Whether we will see a sharper short-term correction in Magnificent Seven stocks is difficult to forecast. But what we can learn from history is that the companies that rank highest by market capitalisation today will not necessarily be the same ones that will be at the top of the charts in ten or even in five years’ time. These cycles of change are accelerating rather than slowing.
Which stocks and sectors will dominate in future is impossible to predict—which is why we also follow index tracking funds to capture the growth of the next Apple. It’s worth noting that active funds, including quality funds, have underperformed this year because of Big Tech’s dominance. That could change if we see tech stocks retreat in the months ahead.
“Everybody knows these guys are going to make money. The only question is how fast is that earnings growth, and have investors overpaid for it.”
– Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute
Global News
- Investors hoping that the earnings season will bring them good news have been looking to Big Tech for positive answers. The earnings of the five largest companies on the S&P 500 are projected to jump 34% from a year earlier on average, according to analyst estimates compiled by Bloomberg Intelligence.
- Alphabet on Tuesday reported quarterly sales that were up 11% year-on-year, ahead of what was expected, which did not stop its shares tumbling 9.5% on Wednesday, the most since March 2020, after weaker than expected growth in its cloud business.
- Amazon reported what investors wanted in the third quarter: robust sales and profit growth along with a hint that the cloud division earnings machine is regaining momentum. Cloud unit sales increased 12% to $23.1 billion. Amazon shares shot up about 5% in extended trading after the news.
- Microsoft posted 13% year-on-year sales growth to $56.5 billion, also beating expectations. Its results were bolstered by recovering cloud-computing growth amid demand for new artificial intelligence products.
- A year ago, Mark Zuckerberg faced disgruntled investors due to Meta’s weak third-quarter earnings and the company’s stock plummeted by over 20%. However, in the subsequent year, Meta’s core business, engaging 3.1 billion users daily on Facebook, Instagram, and WhatsApp while offering advertisers access to their attention, has rebounded strongly. On October 25 the company reported a 23% year-on-year revenue increase to $34.1 billion, the most significant rise since the COVID-19 digital boom. Meta’s stock price has surged by 250% since it’s low point last year, Yet, on Thursday Meta’s shares slid the most in almost 11 months after executives warned of softer advertising spending, putting a damper on the otherwise upbeat earnings report.
- The US economy expanded in the third quarter at the fastest rate in nearly two years, with GDP growing at a 4.9% annualized rate from July through September, mostly driven by consumers reaping the benefits of resilient job growth, rising wealth and easing inflation. This growth, the fastest pace since the end of 2021 when the economy was shaking off the effects of the pandemic, puts the Fed in a tough spot when it comes to interest rates. The Fed chair signalled that policymakers are likely to hold rates steady at their meeting next week, while leaving the door open for another increase in the future.
- Treasury Secretary Janet Yellen said the strong US economy has caused a surge in longer-term bond yields in recent months, rather than being caused by a jump in government borrowing driven by a widening fiscal deficit. Yields have taken benchmark Treasury rates to the highest levels since before the Global Financial Crisis.
- As Republicans appointed little-known Trump ally Mike Johnson as US House speaker, it cemented the party’s rightward shift, and ended a messy three-week succession fight that paralysed legislative work. Johnson has expressed his desire to get the government working and has indicated that an aggregated debt-ceiling increase may need to be passed as a stop-gap by the November 17 deadline, although his preferred route would be to pass a series of smaller spending bills.
- The European Central Bank left interest rates unchanged for the first time in more than a year as it gauges whether an unprecedented series of hikes will succeed in subduing inflation. This matched predictions of all economists surveyed by Bloomberg.
- Chinese President Xi Jinping has indicated that he will not tolerate a sharp slowdown in growth and lingering deflationary risks. Government increased its headline deficit to the largest in three decades and unveiled a sovereign debt package that marked a shift from its traditional model for fiscal support. Xi also made an unprecedented trip to the central bank — sending a strong message about his focus on the economy.
- As at Thursday’s close the S&P was 2.1% down for the week.
Local News
- The Reserve Bank’s six-month gauge measuring economic performance posted a third month of expansion in August, showing a mild improvement in economic activity ahead of the medium-term budget policy statement on 1 November. The composite leading business cycle indicator gained 0.4% in August after a 0.1% increase the previous month.
- The latest poll by Sabi Strategy and The Brenthurst Foundation shows that the ANC’s share in next year’s elections is likely to drop below 41%. As a result, the prospects of a coalition government following next year’s election are more likely than ever. However, what such a coalition could look like and how it is achieved, remains unknown.
- The ANC National Executive Committee has ratified a decision that could well see the party cut ties with the EFF and Patriotic Alliance at the local government level. This came from a document that Daily Maverick has seen in which it stated that the EFF was not an acceptable coalition partner because it was a “proto-fascist party run dictatorially”.
- RW Johnson, writing for BizNews, believes that the greatest line of division within South African politics lies not between the ANC and the DA or even between Jacob Zuma and Cyril Ramaphosa. It is the line that separates the Minister of Finance, Enoch Godongwana, from his successor as head of the ANC’s Economic Transformation Sub-Committee, Mmamoloko Kubayi. Godongwana, who has a degree in financial economics from London, is seen as a moderate, while Mmamoloko Kubayi, as head of its Economic Transformation sub-committee, has no economic training or education at all and is meant to keep Godongwana from coming out with any heretical realism. She has the bulk of the NEC on her side as they oppose Godongwana‘s spending cuts and propose further grants.
- Eskom has approved the purchase of more than 1,100MW from private companies, including mines, that have excess generation capacity. Once added to the grid, it will be enough to prevent one full stage of load-shedding. Electricity Minister Kgosientsho Ramokgopa’s is claiming a “magnitude of strides” in reducing rotational power cuts. However, this could just be another political move as the ANC seeks to show off its achievements ahead of next year’s elections.
- Even though wealthier nations such as those in Europe and the US have pledged more than $8.5 billion for South Africa to reach Net Zero, there is still a R660 billion financing shortfall for just energy transition, expected to cost R1.5 trillion over five years. The amount pledged includes $500 million to accelerate the decommissioning of coal-fired power stations. On Wednesday, the World Bank said it will support South Africa’s transition to using cleaner forms of energy with a $1 billion loan.
- BHI scheme operator Craig Warriner has handed himself over to authorities, pleading guilty to all and any charges. BHI clients have little chance of receiving any money back, and those who have received distributions of any kind in the past 15 years are likely to have these disgorged by the authorities. (Dynasty has on several occasions been requested to evaluate BHI, and we strongly dissuaded clients investing due to the lack of transparency in terms of how returns were derived).
- Africa’s largest wireless carrier, MTN Group, is reviewing a demand by a Nigerian tribunal for unpaid taxes. The Nigerian Tax Appeal Tribunal ordered MTN to pay $72.6 million, according to documents seen by Bloomberg and verified by two government officials, although not officially confirmed.
- At the time of writing, the rand was 0.6% stronger and the ALSI was flat for the week.
Sources: Dynasty, News24, BusinessLIVE, Moneyweb, Business Report, Bloomberg, Daily Maverick, BizNews.com, NYT, CNN, etc.