Market Commentary

The Red Headed Stepchild Blossoms

One of the defining hallmarks of this cycle has been the utter domination of earnings growth and valuation expansion by 7 firms, the Mag-7. We know who they are and what they do, and the uncanny competitive moats they have that protect their earnings power and allow them to produce monopoly-like profits.

The MAGS ETF, which offers equal weight exposure to the Mag-7 stocks, has delivered a 175.13% total return since inception on April 10, 2023. This is a 46.12% compounded annual growth rate (CAGR).

This performance beats the S&P500, which has delivered a 73% total return at a 22.80% CAGR in the same time frame.

The remaining 493 constituents of the S&P500 have been the market equivalent of the American idiom known as the red headed stepchild.

Compared to the Mag-7, the “other 493” were not considered as dynamic, global, technologically leveraged, and or engaged in political and regulatory capture on the scale of the American tech overlords.

The XMAG ETF, which provides exposure to the S&P500, excluding the MAG-7 has been a significant underperformer. While it has a shorter history than MAGS, the CAGR since inception on October 21, 2024, is a sad 11.32%.

To many observers, this second class of firms, while sizeable in the aggregate, are individual dead weight drags on index earnings growth.

This is likely about to change.