Magnificent 7, sure… but increase exposure to S&P 493 too

The gap between the S&P’s 500 seven top-performing names and the 493 also-rans is narrowing, says Jack Manley, executive director, global market strategist at J.P. Morgan Asset Management.

Speaking on the latest episode of the Soundbites podcast, Manley said the time has come for investors to widen their nets to include more names in the U.S. equity universe.

“It makes sense to assess that broader index,” he said. “Analysts are starting to get a little bit more optimistic about the prospect of the S&P 493 — all the other names out there that aren’t the Magnificent Seven.”

The Magnificent Seven — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — have dominated the earnings chart for the past three years.

“In 2023 for example, the Mag Seven grew their earnings by north of 30%. The rest of the index collectively saw their earnings shrink,” Manley said. “In 2024 the Mag Seven grows their earnings by 40%. The rest of the index basically sees no growth in earnings. In 2025, the Mag Seven grows their earnings by 20%. The rest of the index grows by less than half of that.”

That earnings gap, he said, is narrowing.

“Mag Seven earnings are expected to be as low as they’ve been since 2022. S&P 493 earnings growth is expected to be as high as it’s been since 2022. We’re coming closer to earnings growth parity, I would say, between the Mag Seven and everybody else,” he said.

“As investors think about rebalancing, the one big thing I would probably do is — within the S&P 500, at least — look to diversify, not out of the Magnificent Seven, but inclusive of the Magnificent Seven.”

Manley said it doesn’t make sense to abandon the Magnificent Seven, which are still expected to grow earnings at a double-digit clip next year. Neither does it make sense to shun the rest of the equity universe because of their muted performance.

“When you’re looking at 493 laggards, there are some value names in there,” he said. “There are some growth names in there.”

The AI story has led to “serious concentration risk” within the S&P 500 — one of several signs that the U.S. equity market may be in a bubble. Among those indicators:

• Artificial intelligence, which has been driving tech growth, has not yet proven its return on investment leading some to question its true value;
• AI capital expenditure appears to be locked in a circular loop, with money exchanging hands only within the Magnificent Seven, and not bleeding out into the wider economy;
• Valuations — particularly PE ratios — continue to climb to record levels; and
• The value of all U.S. corporate equity is far outpacing the value of the U.S. economy as a whole. Expressed as a percentage of nominal GDP, it now stands at 360% — an all-time high, and far higher than it was even during the dot-com bubble.

On the other hand, he said artificial intelligence may prove to be enough of a social and economic game changer that, like the internet, it justifies the huge capital expenditure and soaring valuations.

“There are some very compelling arguments to be made that while capex right now may not necessarily have the ROI that we’re looking for and that markets right now may be overly valued, all this investment in the infrastructure behind artificial intelligence will eventually make sense,” he said.

“I do think that there ultimately will be something to show for artificial intelligence.”

As for the soaring PE ratios, Manley said the interest rate environment is sufficiently different to justify the risk.

“Interest rates matter a lot,” he said. “They function as sort of the bogey, so to speak, for investors.”

He also pointed out that tech companies are very different from the companies that used to drive the economy.

“The U.S. equity market used to be dominated by energy companies, by banks. These companies inherently command lower valuations,” he said. “The market today is driven by technology. And technology inherently commands higher valuations, because it takes a longer time horizon.”

One of the biggest differences between today’s conditions and the conditions during previous bubbles is the disconnect between value and earnings.

“If you look at where we are today, that disconnect has narrowed quite a bit. These big companies really do pull their own weight in a way that was not necessarily true during dot-com,” he said. “These are not companies that got cooked up in some guy’s garage last week. This is not like the new version of pets.com. These companies have, in many cases, existed for decades. They have multinational footprints. They have proven track records of growth and of innovation. And in many cases, they have rock-solid balance sheets.”

While he allowed that market continues feel “frothy,” he said greater diversification is the appropriate play for investors in the U.S. equity market.

“Volatility and pullbacks are a normal part of what it means to be an investor. But if you are disciplined and well diversified, there’s a pretty good chance that your long-term financial well-being will not be disturbed.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.