Much of the year’s rally is due to the buoyancy seen among some of the biggest of the mega-cap stocks that are collectively called the “Magnificent seven.” SPAC King Chamath Palihapitiya weighed in on the trend and its associated risks.
What Happened: Captioning his post as “Magnificent Seven (M7) or Bust,” Palihapitiya noted that these seven stocks have been trouncing all the other stocks this year. Magnificent Seven is the collective name given to mega-cap tech names, namely Nvidia Corp. (NASDAQ:NVDA), Microsoft Corp. (NASDAQ:MSFT), Meta Platforms, Inc. (NASDAQ:META), Tesla, Inc. (NASDAQ:TSLA), Amazon, Inc. (NASDAQ:AMZN), Apple, Inc. (NASDAQ:AAPL), and Alphabet, Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG).
“It also true that it’s multiples are approaching some very heady territory,” Palihapitiya said.
See Also: Best Mega Cap Stocks Right Now
Market-Cap Weighted Vs. Equal-Weighed: Palihapitiya recommended investing in the Nasdaq100 Equal-Weighted index rather than a traditional market-cap weighted index for relatively less risky exposure to the Magnificent Seven. He said that the Magnificent Seven stocks account for almost 30% of a market-cap-weighted index, creating a very undiversified index.
In an equal-weighted index, each stock counts equally vis-a-vis a percentage based on its market cap, Palihapitiya said, adding that the Nasdaq 100 Equal Weight did better than the S&P 500 Index. He noted that the former gives you exposure to the Magnificent Seven without it having to be almost 30% of the index.
“So it mimics the return without the concentration,” the SPAC King said.
On the flip side, the Nasdaq 100 Equal-Weighted index has many companies that were loss-making and a few others that need to refinance debt soon, which would be expensive when the fed funds rate is more than 5%, Palihapitiya said.
“Nothing is perfect which explains why so much money continues to pile up on the sidelines (chart 4). Onwards!” he added.
The Direxion NASDAQ-100 Equal Weighted Index Shares (NASDAQ:QQQE), an exchange-traded fund that tracks the performance of the Nasdaq 100 Equal-Weighted Index, rose 0.20% to $78.44, according to Benzinga Pro data.
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