The Weekend Edition is pulled from the daily Stansberry Digest.

Stocks Aren't That Expensive Without the 'Magnificent Seven'

By Corey McLaughlin

Just like that, we're halfway through 2023...

And the trend for stocks is up again.

The S&P 500 Index is up roughly 18% since the start of the year. Why? Well, we can get into all kinds of debate about that. But generally speaking, the widely expected recession that many market pundits have been talking about for more than a year hasn't arrived yet.

The jobs market is still strong, with the unemployment rate still near lows. Enough folks are still spending money on needs and (some) wants. And while high inflation remains "sticky," it's showing signs of deceleration (though not across the board).

That's, in a nutshell, one argument you could make. In any case, the price action says that the major U.S. stock indexes are up... And many tech stocks that were among the biggest losers of 2022 are the biggest winners in 2023.

Case in point: The tech-heavy Nasdaq Composite Index is up more than 36% in the past six months while the boring old Dow Jones Industrial Average is up less than 4%, and the S&P 500 is just about splitting the difference...

Whatever you think about the "why" or "how" of what has happened so far, let's put it in the past. As investors, the future is all we have to work with now.

History suggests more gains are ahead...

A strong start for stocks like we've seen in 2023 has usually meant good things for the rest of the year. It doesn't mean it will happen, but odds suggest higher prices ahead...

Our colleague and Stansberry Research senior analyst Matt McCall discussed this on a recent midyear edition of his Making Money podcast. He noted that when the S&P 500 has gained 10% or more through the first half of the year, it has finished even higher more than three-quarters of the time.

To be specific... since 1950, the S&P 500 has rallied 10% in the first six months 22 other times. The median gain for the U.S. benchmark index over the next six months was an additional 10%... And the index ended the year higher 82% of the time.

If this interests you at all, be sure to check out Matt's podcast for more. He covers a variety of angles, including the Federal Reserve's continued influence, recession probabilities, and what to watch in the second half of 2023.

But wait, it's just a few stocks leading the market higher, right?...

If you listen to the mainstream financial media, the buzzword you might hear is "narrow," meaning that only a few stocks have led the overall market higher.

We've debunked this argument a few times recently.

No doubt, the popular tech stocks – many of which are heavily weighted in the S&P 500 and even more so in the Nasdaq – have gathered a lot of mainstream hype. And they've soared to uncommon gains this year.

Names like Nvidia (NVDA) and Apple (AAPL) have made headlines – again – and have benefited from the artificial-intelligence ("AI") buzz...

And stocks like Meta Platforms (META) and Netflix (NFLX) are up more than 150% and 50%, respectively.

The so-called "Magnificent Seven" – Apple, Meta Platforms, Nvidia, Alphabet (GOOGL), Amazon (AMZN), Microsoft (MSFT), and Tesla (TSLA) – are up an average of 100% since the start of 2023 and make up 26% of the S&P 500 Index.

So when one of these names moves – higher or lower – it can skew the widely followed S&P 500 Index, yes.

But the "market" is way more than these names...

And when you look beyond the tech buzz, you'll see an argument to be made for the rest of the market "catching up" rather than falling for the rest of 2023.

Market breadth – a good gauge of overall market health – is about average, not too high or too low. That's a good thing. As I write today, around 60% of S&P 500 stocks are trading above their 200-day moving averages (a technical long-term trend).

As we wrote in the Digest recently – when this number was closer to 50% – you could take this market-breadth argument one of two ways...

Either roughly half of U.S. stocks can still get into an uptrend from here – meaning more upside for the broader market ahead – or half can get into a downtrend, meaning more downside.

Whichever of those outcomes happens, that's less risk than, say, 2021... when nearly every stock on the New York Stock Exchange was trading above its long-term technical trend.

Today, the number of NYSE-listed stocks going up versus down each week has plateaued since a decline back in January and February... And while market sentiment has turned more bullish, it is not at an extremely bullish level yet.

That tells me there is more room for stock prices in general to move higher. At the same time, the simple indicators for short- and long-term technical trends for the major indexes have been bullish for several months.

And if you take the popular names out of the equation...

Disregard the Magnificent Seven, and you'll find a market that isn't overvalued.

That's an important piece of information for long-term investors. Stansberry Research senior analyst Alan Gula shared a terrific analysis about this in our most recent issues of Portfolio Solutions...

Those flashy tech names we mentioned earlier have undoubtedly risen a lot... and their valuations have appeared to make stocks "expensive" based on some popular metrics.

This is worth thinking about because the more "expensive" the market, the less upside potential remains. It turns out, though, as Alan showed, the market isn't historically expensive if you take the popular names out of the equation.

For Portfolio Solutions subscribers, Alan ran the entire stock market – with and without the Magnificent Seven – through his proprietary free-cash-flow ("FCF") valuation model. Without giving away the details, the higher a stock's percentage of FCF yield, the cheaper it is.

What Alan found may surprise you...

The market may be expensive as a whole, but that's because it's top-heavy. So when I exclude the Magnificent Seven, you can see that the rest of the market isn't all that pricey...

The rest of the S&P 500 has an FCF yield of around 4.4%. That's about average since 2016, and it's cheaper than the 3.7% FCF yield from early 2021.

Now, you might argue that this means the start to 2023 for U.S. stocks isn't as strong as it would appear on the surface... that these flashy names like Nvidia and Tesla could be due for a pullback, or the market could be susceptible to a shock.

Yes, that's true. That's why I always find it useful to chart market breadth... If only a few names were leading the indexes higher, we'd be inclined to be more bearish. But more than half today are trading in longer-term uptrends.

The bullish case is that this "divergence" could suggest that if stocks, generally speaking, remain in an uptrend, the majority of stocks not in the Magnificent Seven should push higher before 2023 ends.

Now, I'm not saying a recession isn't ahead...

Nor do I believe that inflation isn't a problem... or that geopolitical risks could never upend the status quo for U.S. stocks...

Those are all risks, and market sentiment can change quickly. We'll always be looking for signs of that, as well as whether key technical indicators show signs of bigger risks ahead for stocks. (We also haven't even talked about bonds or commodities or anything else today.)

Personally, I believe we'll see some kind of "official" recession – with higher unemployment – though it may not happen until 2024.

But one of the first lessons I ever learned about Mr. Market is that he doesn't necessarily care what we think.

For now, the market is reflecting that the "worst" for stocks is further in the past than it is ahead in the future.

Good investing,

Corey McLaughlin

Editor's note: AI has captured the public's imagination... And that growing interest has pushed the seven largest stocks in the S&P 500 to a combined valuation of roughly $11 trillion – almost triple the value of the German economy. But this story has taken an even more dramatic turn...

You see, AI has reportedly "broken" one of the most fundamental laws of technological advancement... And it means most investors could swiftly be shut out of this trend.

So on Wednesday, July 19, Marc Chaikin and Dr. David "Doc" Eifrig will be sharing the stage for the first time to answer your biggest questions on the potential (and peril) of AI. It's free to tune in online... But you must reserve your spot in advance. Get the full details here.

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