Mag Seven Drove 88% of Profit Growth—The Rest of the Market Is Stagnant

During their recent episode, Taylor, Carlisle, and Chris Bloomstran discussed Mag Seven Drove 88% of Profit Growth—The Rest of the Market Is Stagnant. Here’s an excerpt from the episode:

Tobias: Yeah. If that’s the backdrop, what do you think about the earnings growth in those largest companies?

Christopher: Well, you talk about the Mag Seven making up 88% of profit growth for last three years, you haven’t had a lot of earnings growth in aggregate. Again, you had a margin decline for the non-Mag Seven. But earnings on the S&P 500 were 208 and change in 2021. I don’t know, they’re 230 something today. You’ve had 25 plus percent sales growth, but your profit growth has been half that. That’s a byproduct of inflation, and it’s also a byproduct of– You don’t have the share repurchases that you did. When the companies that are generating cash are now spending way more money on CapEx, you don’t have as much money to do other stuff. And if you’ve got inflation, that is a tax on profitability.

You’ve seen it in a lot of industries. Manufacturing here and abroad has been weak. Retail especially at the lower end of the consumer. We own a bunch of retail, because we find the stocks really cheap, Dollar General and Dollar Tree. Even a Starbucks being case is in point. It’s just the broad market. Again, I find the cap weighted US stock market price for perfection. That’s the last place I think you’d want to allocate capital.

It’s not just me. I mentioned Vanguard. I did the whole section, and I attributed it to Jack Bogle. But Vanguard’s own analyst team, put out a couple papers at year end and essentially said, for the next 10 years, your S&P 500, your cap weighted S&P 500, they’re the Vanguard 500 Index Fund and all the iterations of it is going to do 2.8% to 4.8% a year. And over 30 years it’s going to do an average of 4.7% to 6.7%. So, call it 5.7%.

Well, you survey the typical 401(k) investor, or you survey the typical endowment fund manager or pension fund manager, nobody thinks stocks are going to do 3.8% for the next 10 years. But Vanguard said it. Toby, it goes back to your math. However you skin it, it’s really hard to make a case that the US cap weighted stock market is the place to be. There are places to be, but that to me is not it.

Tobias: The index weighted towards the biggest end of town in the index.

Christopher: Yeah.

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