The S&P 500 index is value weighted, which means that each company’s contribution to the index reflects its individual market capitalization. This year, through July 2024, the index has risen almost 16 percent, driven in large part by the outsize returns of its largest constituent companies, popularly known as the “Magnificent Seven.”1
Yet there’s also a curious difference by investor category: intrinsic investors (the class of investors that take and hold a position in a company over long periods, after rigorous due diligence of its intrinsic ability to create long-term value) have lower shareholdings in the Magnificent Seven than in other S&P companies—12 percent of the Magnificent Seven, versus 17 percent for other S&P companies. By contrast, retail investors (nonprofessional investors who tend to buy and trade stocks over shorter holding periods) disproportionately own Magnificent Seven shares—30 percent of the Magnificent Seven, compared with 18 percent for other S&P 500 companies (exhibit).
Whether one or a few stocks are overpriced, of course, requires a deeper analysis of each company’s value relative to its fundamentals. In the past, we’ve observed that when retail investors drive up a company’s share price, it sometimes indicates a bubble for the company’s share price. There is too much uncertainty about the future of the Magnificent Seven to draw that conclusion, however. But, as ever, investors should be able to articulate what they believe future performance must be in order to justify the current price.
