Using data from Curvo, £10,000 invested in the SP500 (US) in 2000 would be worth £73,429 today. When compared to the FTSE 100 (UK), the same investment amount would now only be worth £31,823 (figure 1).

(Figure 1 sourced from Curvo.eu))

 

According to Curvo, over the last 20 years, the SP500 has generated an average annual return of 12.5% compared to only 6.9% by the FTSE 100, with a compound annual growth rate of 8.57% for the SP500 and 4.89% for the UK market. 

 

So what are the reasons for this outperformance from the US market?

 

High Liquidity

Bigger likelihood of finding a buyer or seller of any stock at any time, with a smaller spread, and less danger of market manipulation as the US is the largest and most liquid market in the world.

Innovation

The American market has seen the emergence of several extremely innovative businesses, which is an element that frequently sets up businesses for rapid expansion and increased profits.

Enhanced Capitalisation

With a market capitalisation of more than $50 trillion, the New York Stock Exchange (NYSE) and the NASDAQ together make up the world's deepest financial market. This gives investors additional alternatives and choices by enabling them to hold shares in the biggest corporations in the world.

Wider Variety

Allows for Investments in U.S. government bonds, corporate bonds, ETFs covering other industries and sectors, and ADRs representing shares of non-U.S. corporations to diversify your portfolio beyond equities.

Reduced risk associated with currency

Given its historical strength and status as the primary reserve currency, the U.S. dollar helps to reduce the risk associated with volatile exchange rates.

 

The Influence and Importance of the Magnificent Seven on the US Stock Market, how it impacts Returns?

 

The "Magnificent Seven" refers to seven of the largest and most influential technology companies in the U.S. stock market. As of recent years, this group includes:

1. Apple (AAPL)
2. Microsoft (MSFT)
3. Amazon (AMZN)
4. Alphabet (GOOGL - parent of Google)
5. Meta Platforms (META - parent of Facebook)
6. Nvidia (NVDA)
7. Tesla (TSLA)

 

These companies have become central to the performance and direction of the U.S. stock market, particularly within major indexes like the S&P 500 and NASDAQ 100. Here's why they're so important:

 

1. Market Leadership

These companies dominate their respective sectors, especially technology, e-commerce, artificial intelligence, cloud computing, and electric vehicles. Their leadership in innovation and profitability makes them key drivers of overall market growth. When these companies perform well, they often lift the broader market with them, as their influence on indices is substantial.

2. Large Market Capitalisation

The combined market capitalization of the Magnificent Seven companies accounts for a significant portion of the U.S. stock market. For example, as of 2023, these companies made up nearly 30% of the S&P 500's total value. This means their stock price movements have a major impact on market indices. If these stocks rise or fall sharply, they can sway the performance of the entire index, even if smaller stocks are relatively stable.

3. Tech Sector Dominance

The U.S. stock market has been increasingly driven by technology companies, and the Magnificent Seven are at the forefront of this trend. Their dominance has shifted the market from being more industrial and finance-driven to technology-centric, reflecting the broader economy’s digital transformation.

4. Investor Sentiment and Concentration Risk

Investors tend to view these companies as "safe bets" because of their dominant positions, high growth potential, and strong balance sheets. As a result, there has been significant concentration in these stocks, especially in passive investment vehicles like ETFs. However, this also creates concentration risk. If these companies were to face significant challenges or downturns, it could cause outsized volatility and losses for broader markets due to their dominance.

5. Global Influence and Innovation

These companies are at the forefront of global technological innovations, driving major trends in artificial intelligence, cloud computing, social media, e-commerce, and hardware advancements. Their global reach and impact on business models worldwide have made them essential not just for the U.S. market, but for the global economy.

6. Revenue and Profit Powerhouses

These companies generate vast revenues and profits, leading to significant shareholder returns via stock price appreciation, dividends (in some cases), and stock buybacks. This profitability is crucial to sustaining U.S. equity markets, especially during times of economic uncertainty. They also have large cash reserves, giving them flexibility during downturns.

 

In summary, the Magnificent Seven are crucial to the U.S. stock market because they represent a large portion of the market's value, drive key technology trends, and have outsized influence on major stock indices. Their performance can significantly impact the broader market, and they act as bellwethers for both market sentiment and economic health.

 

 

(Sources: Curvo,eu)