A few days ago, I attended the Ninety One Taking Stock webinar. Ninety One is one of South Africa’s largest asset managers, and their flagship funds have performed well over the past decade.
I always enjoy their presentations as they offer insights from highly resourced asset managers. These webinars provide a view into their thinking—what we’ve been through in recent years and what may lie ahead in the coming years and decades.
The US and the Magnificent 7
Over the past decade, the only geography where you have seen any real market growth has been the US, and more specifically, a small group of companies often referred to as the “Magnificent 7” or, more recently, the “Fabulous 5.”
The US has experienced two years of remarkable market growth. The chart below shows 2023 and 2024, highlighting the performance of the Magnificent 7 that have driven the US markets, and compared to the rest of the world (The MSCI All Country World Index)
Source: Ninety One Taking Stock Webinar
In 2023 and 2024, the MSCI World Index (the benchmark for global equity managers) delivered returns of 22% and 17.5% in USD, respectively. While these are solid returns, the Magnificent 7 soared, delivering 107% in 2023 and 67% in 2024.
This extraordinary growth raises two key questions:
- Are these companies in bubble territory?
- Will this growth continue?
People have been calling these companies overpriced for over a decade, yet those who sold out for that very reason have really missed out. I know of very prominent asset managers who sold out of Microsoft in 2018. While the argument that these companies are expensive is valid, they can always get more expensive.
The big question going forward, however, is whether these companies can generate higher earnings from the approximately $300 billion they’ve spent on AI and large language model programs. Was this a good use of capital? Is AI everything it’s hyped up to be? Are these companies genuinely confident in their ability to monetize AI, or are they simply pursuing AI out of fear of missing out? We will likely find out in the next couple of years.
If they can’t sufficiently monetize AI, we may be witnessing one of the largest misallocations of capital in the past 50 years.
Market Concentration and Risk
The chart below shows the Magnificent 7 up 246% in the past 2 years. In comparison, the MSCI World Index grew by 43.5%. That’s still over 20% a year.
Source: Ninety One Taking Stock Webinar
The US stock market is now the most concentrated it has ever been. The top 10 companies account for 39% of the total market capitalization
Source: 91 Taking Stock Webinar
This level of concentration presents risks. If the heavy investment in AI doesn’t meet expectations, we could see a sharp decline in the value of the Magnificent 7, with substantial repercussions for US markets as a whole.
Sentiment and Valuations
We are living in a world where sentiment drives much of the market. Crypto, AI, and the dominance of large tech companies are prime examples. Over the past two years, much of the market’s growth hasn’t come from dividends or earnings growth (where you’d want it to come from) but from multiple expansion—stocks simply becoming more expensive.
Valuations are one of the strongest predictors of future returns. And the data clearly shows that the higher the valuations, the lower the expected returns will be. In fact, given today’s valuations in the US, the expectation is for a roughly 2% real return over the next decade. That doesn’t necessarily mean 2% a year for the next 10 years – it could mean we see a short period of severe multiple compression (market declines) which bring valuations in line with longer term averages.
Return Expectations
The final chart below outlines Ninety One’s return expectations per asset class over the next five years.
Source: Ninety One Taking Stock Webinar
It’s important to note that these expectations are based on the specific companies Ninety One holds in each asset class, not just the index level. For example, they anticipate returns of approximately 7.5% to 12.5% per annum from global equities. It’s also important to note that Ninety One only holds Microsoft and Alphabet in its flagship global equity fund, so don’t have a large exposure to the Magnificent 7. This could be to their favour if we see multiple compression, or could be a drag if these companies continue to outperform and AI really takes off.
Interestingly, they see even higher return potential from South African-listed global equity companies—businesses listed on the JSE but whose earnings are entirely offshore. This expectation is driven by a combination of lower starting valuations and expected earnings growth from these companies.
