It is unlikely any stock has an expected return of 100% per year. That seems too high to be the cost of equity capital for a company, and it's doubtful anyone would sell a stock with an expected return 10 times the historical stock market return.1 A realized return that big likely means the company surprised investors in a good way.

The Magnificent 7 stocks returned on average more than 111% in 2023, exceeding the S&P 500 Index by over 85 percentage points. While it's hard to say what cash flow expectations were built into their stock prices, comparing analyst earnings estimates to actual earnings suggests these companies exceeded expectations for the year. All seven reported earnings exceeding average forecasts. For example, Nvidia posted an earnings per share 37.4% higher than the average analyst expectation. Contrast this with 2022, when five of the seven companies' earnings fell short of analyst expectations. The average Magnificent 7 stock return that year trailed the S&P 500 Index by 28 percentage points.

Expecting Mag 7 outperformance to continue is to bet on these companies further exceeding the market's expectations. Simply meeting expectations may result in returns more in line with the market, consistent with the history of top US stocks.

Surprise, Surprise

Magnificent 7 actual vs. analyst forecast earnings per share, 2022–2023

Past performance is not a guarantee of future results.

Source: FactSet for earnings per share and returns for the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla). Actual earnings are those reported for the fiscal year ending the year indicated. Expected earnings are the average analyst forecast at the start of the fiscal year.

This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. Named securities may be held in accounts managed by Dimensional.


This article originally appeared in Above the Fray, a weekly newsletter for Dimensional clients.


Footnotes

  1. The S&P 500 Index had an annualized return of 10.3% from January 1926 to December 2023. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

The article on this page was republished here with permission of Dimensional Fund Advisors LP. No further republication or redistribution is permitted without the consent of Dimensional Fund Advisors LP. 



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About the Author

WesCrill

Wes Crill - PhD, Senior Investment Director and Vice President - Dimensional Fund Advisors

Wes earned a BS and a PhD in materials science engineering from North Carolina State University. As a member of the Investment Solutions Group at Dimensional Fund Advisors, he directs empirical research on a broad range of investment topics to support client relations.

Wes Crill
Written By Wes Crill

PhD, Senior Investment Director and Vice President - Dimensional Fund Advisors

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