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As Nvidia reports, here’s the history of what happens next after ten giant stocks outperform
Steve Goldstein
5 min read

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The rest of the forest can grow even after giants surge, according to an analysis.
The rest of the forest can grow even after giants surge, according to an analysis. - Getty Images/iStockphoto

Nvidia reports after the close of trading on Wednesday, and learning that, one can be forgiven for skipping the rest of the newsletter. If so, see you after 4 p.m. Eastern.

For those who stick around, thanks, and here’s some Nvidia-related insight.

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It comes courtesy of the fund manager AllianceBernstein, which looked at periods where the top 10 stocks dominated over the last three decades.

They identify four such periods. “In 1996, technology and healthcare companies were heavily represented in the top 10, owing to a confluence of favorable economic and market conditions. Three years later, the dot-com boom fueled outsized returns for the 10 biggest stocks, again heavily weighted in technology. Fast forward to 2020, and technology stocks again powered ahead—but in very different circumstances. This time, it was the COVID-19 pandemic that accelerated the adoption of digital services, e-commerce, remote work and cloud computing,” they say.

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What happened next? In each of those periods, the broader S&P 500 index outperformed, though in two of those cases the market actually fell.

The fund manager said the lesson is it’s risky to own the entire group at benchmark weights, though not doing so has its risks as well. That’s borne out in a separate analysis: through the third quarter, the average large-cap mutual fund was 806 basis points underweight the Magnificent Seven, according to Goldman Sachs data, and only 31% of large-cap mutual funds have outperformed their benchmarks this year. As the chart shows, it was the funds that were underweight the Magnificent Seven that were more likely to have struggled.

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Supporting the AllianceBernstein argument, however, is the fact that earnings growth for these giants is projected to slow.

According to UBS, the projected earnings per share growth differential next year between the Magnificent Six (excluding Tesla) and non-tech stocks is expected to be just 5%, having peaked at around 60%.

“The hyperscalers might be in danger of overinvesting at some stage. They are the major customers for semis AI in particular,” say UBS analysts led by Andrew Garthwaite. “If the customers start to underperform, the danger is that they cut back on capex, which is bad for their suppliers.”

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