Rethink your investment in mega-cap tech stocks

After years of remarkable growth, the “Magnificent 7” stocks (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla) now dominate the S&P 500 Index, representing about 30% of the index’s market capitalization. The significant presence of these mega-cap tech stocks in benchmark equity indices and their strong mutual correlations pose a potential risk for investors, cautions Morgan Stanley. If these stocks were to fall to their December 2022 valuations, their market capitalizations might decline by a third, potentially causing a 9% drop in the S&P 500.

The Magnificent 7’s influence is far-reaching. For instance, the benchmark MSCI All-Country World Index consists of nearly 3,000 stocks from developed and emerging economies. However, the ten largest U.S. stocks, including the Magnificent 7, make up 20% of the index.

“To put the enormity of these 10 companies in perspective, their market capitalization is equal to all listed companies in the UK, France, Germany and Japan combined. A decade ago, their market cap would have made up less than half of that value,” says Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley.

“To reduce their risk, investors should consider adding exposure to U.S. bonds and non-U.S. equities, as well as equal-weighted S&P 500 strategies and alternative assets,” suggests Shalett.

Read the full analysis here.