One of America's most respected investors says the ‘Magnificent Seven' isn't overvalued — the rest of the market is

Howard Marks of Oaktree Capital Management contends that the "Magnificent Seven" stocks are not overvalued, despite their high average P/E of 33x, citing their exceptional fundamentals, market share, and competitive moats. Instead, Marks views the valuation of the remaining 493 S&P 500 companies as problematic, with an average P/E of 22x, significantly exceeding historical market averages. This assessment leads him to conclude that the overall stock market has transitioned from merely "elevated" to "worrisome," emphasizing that while overvaluation cannot be definitively proven, current conditions suggest a shift in market risk.

Analysis

Influential investor Howard Marks of Oaktree Capital Management posits that the primary valuation risk in the current market lies not with the 'Magnificent Seven' but with the rest of the S&P 500. He justifies the high average price-to-earnings (P/E) ratio of approximately 33x for the Magnificent Seven by citing their exceptional fundamentals, including strong market share, high incremental margins, and competitive moats. In contrast, Marks expresses concern over the average P/E of 22x for the remaining 493 companies in the index, a figure he notes is significantly above the historical S&P 500 average in the mid-teens. This valuation discrepancy is particularly notable given the S&P 500's 58% gain in 2023 and 2024, with over half of that performance driven by the seven mega-cap tech stocks. Citing this dynamic, Marks concludes that the overall stock market has transitioned from an 'elevated' to a 'worrisome' state, signaling a heightened risk environment even without predicting an imminent correction.

Key Decisions for Investors

• Investors should critically re-evaluate their exposure to the S&P 493, as their collective average P/E of 22x is well above historical norms and identified as the primary source of market overvaluation.
• Consider the concentration risk in portfolios heavily weighted towards the Magnificent Seven, and assess whether their fundamentals continue to justify an average P/E of 33x relative to the broader market.
• Given the market's shift to a 'worrisome' valuation level, it may be prudent to increase selectivity, focusing on individual company fundamentals rather than broad index exposure, and to prepare for potential volatility.