Beyond The Magnificent Seven: Discovering Equity Opportunities in The S&P 493

The top 10 stocks, as I think a lot of people know, are 40% of the index. This is the most concentrated that the S&P has ever been. It's that simple. Over the past few years, just a handful of mega-cap AI-powered companies have driven a significant share of US equity market returns. The so-called magnificent 7 have reshaped portfolios, headlines, and investor expectations. But markets don't stand still, and leadership doesn't either. So how can long-term investors navigate this unique moment in time and the potential for market broadly? Welcome to the bid, where we break down what's happening in the markets, and explore the forces changing the economy and finance. I'm Oscar Polito. Today, I'm joined by Ibrahim Kenan, head of the US Core Equity team within BlackRock's Fundamental Equities Group. We'll explore with this period of historic concentration tells us what investors may be overlooking and how to think about opportunities beyond the biggest names in the market. Ibrahim, thank you so much for joining us on the bid. Thanks for having me. Ibrahim, we want to talk about the stock market today, and specifically the US stock market, and maybe more specifically the S&P 500. We're at a point in time right now where the concentration in the S&P 500 is quite unusual. The magnificent 7 stocks, which are tech and AI adjacent companies have driven an outsized proportion of the returns in recent years, and they've become a big part of this US equity benchmark. I think people know that, but perhaps we can start with how unique a period in history is this in terms of the proportion that they represent. Oh, absolutely. It is a really unique period of time. When I look at the US equity market today, the top 10 stocks, as I think a lot of people know, are 40% of the index. That's the most concentrated that it has ever been. We track market concentration going back over 100 years. If you look at the US market over 100 years, we've had many periods of time where the market has been concentrated. Going into the Great Depression, the market was dominated by radio, by autos, by variety of companies. Going into the 1950s, we had the nifty 50s, Johnson and Johnson, Xerox, going into the dot-com bubble. We had a real concentration in tech stocks like Cisco. During COVID, we had concentration, and now today we've got the magnificent 7. When you look at that concentration, there's always been periods of time where we've had market concentration, but it's really never been this concentrated. What you're saying is, it's not unusual for companies to make up an outsized proportion of the index. You've drawn some historical examples, but is this a very unique period where the 40% that is in the top 10 is that high relative to history? Then what does it mean for somebody who's invested in the S&P? What does that do to their portfolio if there is such a concentration in some of those names? It's that simple. We've never had a period of time where the top 10 stocks were 40% of the index. It's really important because we're used to thinking that the S&P 500 is broad and diversified. It's 500 companies. You think, "Okay, I'm getting exposure to 500 companies." The reality today is that it's really dominated by these 10 companies. When you think about what it means, I think in one hand, obviously, it means that most of your exposures in 10 companies. On the other hand, it also means that you have a large set of companies that are actually underexposed in the index. There are a lot of large, innovative companies in the United States, but not a lot of them are large in the index. Just as an example, if you think about a $200 billion market cap company in the US today, do you know how big that company is in the index? I would think it would be a reasonably sized position in an index given that a $200 billion company sounds pretty big. That's exactly right. You would think that. If it was a European company, actually, it would be a top five or a top 10 company in the index. Because it's a US company, because it's in the US market, the US market is so top-heavy, a $200 billion company today in the S&P 500 is 0.2 percent of the S&P 500. It's really incredible. I think there's obviously the opportunity of having your exposure in 10 stocks, but there's also the opportunity cost of not having enough exposure to these large, innovative $200 billion companies. A $200 billion company, you're saying, if you were to take that size company and put it in a European equity market index, it would be a top holding. But in the US, when you put it in the S&P, because you have trillion dollar market cap companies, it can go a bit unnoticed. So, Ibrahim, when you think about the other 490 companies in the S&P or the other 493, if you just isolated that the Mag 7 has those big companies, what are some of the signals that you're looking for to understand if some of those other companies, the best of the rest, I think, is what you've labeled them, start to outperform. What are you looking at? No, that's exactly right. The best of the rest. I think that's a really good way to phrase it. The first thing that we look for is we take what we call an earnings first approach. So, let's look under the hood and see what's happening from an earnings perspective. And when you look at the index, you find that there's something really fascinating that's been happening. In 2023 and 2024, the Mag 7 grew earnings almost 40% a year, really incredible level of growth. That's why the market is so concentrated because they grew so fast. And you look at this year and last year, they're still growing around 20%, really healthy level of growth. It's lower, but it's still healthy. Now, here's the really interesting part. If you take the Mag 7 out of the earnings growth that the S&P would have not grown earnings between 2023 and 2024. And I think that's just so incredible to think about that. The S&P would have not grown earnings. And everyone thinks the S&P has been doing so great. And it's a great index. And it is a great index. But it's really been a very narrow index. But here's what we think is really exciting. Last year, those remaining companies in the index, they finally started to grow again. So they grew almost 10% last year. They're expected to grow over 10% this year. And so that earnings growth between the Mag 7 and everyone else is finally converging. And that's the first thing that we look for. Talk a little bit more about that. What changed in the environment that is causing the best of the rest to start to grow earnings again after a period where you're saying they didn't grow earnings at all? There's two big things that have happened. Number one is, if you think about the period of time between 2023 and 2024, we were coming off of COVID. There's a lot that happened or encoded. One thing that happened was people spent most of their time at home. They're buying a lot of goods. And so part of it was there's just so much excess that happened during COVID. And it took a little bit of time for companies outside of the Mag 7 to really digest that. So I think we're finally getting through that. Those companies can now resume the level of consumption that we've seen historically. The second thing that has happened is as we know, the Mag 7 are spending an incredible amount of CapEx, almost a trillion dollars of CapEx this year. That benefit has historically gone to inero-set of companies. Obviously Nvidia has been one of the biggest beneficiaries of that. But now that benefit is starting to spread across the economy. It's not just Nvidia. There are other companies within tech that are finally starting to benefit from this. There are non-tech companies that are starting to benefit from this. Industrial companies, utility companies, there are healthcare companies that are benefiting from this. The benefit of this AI theme is really spreading across the economy and we're starting to see that show up in earnings. You're saying that the hyper scalers, these are the big tech company. A lot of these are part of the Magnificent 7 have been spending CapEx, as you mentioned, as the AI Industrial Revolution takes hold. The beneficiaries of that have been very narrow. But now that's starting to broaden. Is that mean that the hyper scalers are buying the products of these firms? Or does it mean that these firms are starting to use AI? Or maybe it's both? Oh, it's absolutely both. That's a really good distinction. So on one hand, when you think about a data center, obviously if the GPU is critical to a data center, that's why Nvidia is done so well. But when you think about that data center today, there are so many other inputs that go into a data center. There's memory that goes into the data center. There's interconnectivity within the data centers, interconnectivity across data centers. There's cooling that needs to go into the data center. So the infrastructure spend around the data center is really broadening out. And we talked a little bit about market concentration. On video, as a four to five trillion dollar market cap company, now think about how many companies are in this AI infrastructure ecosystem that have market caps of $10,50,100,000,000, while a 1% move in Nvidia stock is $50,000,000 of market cap. If that 50 billion of market cap were to go somewhere else, that could be a doubling or a tripling of that other stock. I think that AI infrastructure broadening out could have a really sizable impact on those companies. Now, you brought up a really good distinction, which is there are also companies that are using AI. I think that's one of the most underappreciated parts of the market today. There are a set of companies, and I think you've seen really the beginning stages of seeing companies that are using AI to become better companies. This isn't just about cost cutting, right? This is about using AI to become a better company. I'll give you an example. There's a company called Hasbro. I think a lot of us are familiar with Hasbro. It's a toy company. It's been around for a long period of time. On Hasbro's latest earnings call, they talked about all the ways that they are embedding AI into their processes. They're using AI to help them and 3D printing to help them prototype toys much faster than they used to before. Now with AI, they can prototype 10 times as many toys as they used to. Now with AI, they can get a better sense for which toys are going to resonate with their customers. Hasbro reported earnings a few weeks ago. They're seeing an increase in revenue. They're gaining market share, and the stock was up 10% on that earnings day, almost 10%. Here's a really interesting thing. Not all companies are doing that. One of their competitors that we've been observing isn't doing this. They're losing market share. They actually reported a week after that, and their stock was down 25%. So you're really starting to see real winners and losers within the broader US equity market landscape. I think that's really creating a lot of opportunities for active investing. It looks like when you look at the market this year, the S&P is really good. It's roughly flat over the course of this year. It's been a little bit up, a little bit down, but I think what you're highlighting is that underneath the surface, there's a lot of dispersion. You've used a very specific example, but it sounds like AI is impacting some companies very positively, and perhaps other companies aren't taking advantage of it. And that's creating a bit of an environment for you to generate performance. It's never been as exciting as it is now to be an active investor. We're seeing real dispersion in the market. Something that we haven't seen in a long period of time. For every company in the market today, you have to ask the question, is this company going to be around in 10, 15 years? This was not something we had to ask before. That question is really more applicable than it has ever been. Ibrahim, you gave the example of Hasbro, a toy company. Are there specific sectors that you see the AI beneficiaries living in, or is the opportunity in those other best of the rest companies? Is it pretty broad-based across a number of sectors? I'd say it's really broad-based. There aren't a lot of opportunities yet. We're still early. There aren't a lot of Hasbro's, but the ones that you do find, they're really good investments. There aren't a lot of them, but there are a few across a variety of industries. We're finding opportunities in consumer like Hasbro. We're finding opportunities in healthcare companies that are using AI to become better at R&D. We're finding opportunities in industrial, logistics companies that are using AI to become more efficient with their logistics. We're finding opportunities in financial services. That's an area that I think has really been talked about quite a bit, but that's an area where you could really use AI to become a better financial services company. I say that real impact is real broad-based, but again, because the market is so concentrated, I think that's the real opportunity for investors like myself. You look at Hasbro, for example, toy company, almost 20 billion market cap, three basis points in the S&P 500, really small exposure in the S&P 500. Is AI the only catalyst that is causing you to have interest in some of these companies? Or are there just other more idiosyncratic reasons that you find the investment opportunity? I think it's pretty broad-based. AI is one piece of the puzzle. We do have, as I mentioned, a lot of companies that effectively been in recession for a very long period of time and now are coming out of recession. You think about the industrial space, for example, the ISM manufacturing index, which is a gauge of industrial activity in the United States, was below 50, for almost three years. Below 50 means that it's in a recession, effectively. That's the longest that it's been below 50s since the 1980s. Think about how many companies have effectively been in a recession for a long period of time and are now finally coming out of that. We're looking at the market really from an idiosyncratic lens. We're trying to find opportunities whether it's AI-related or not AI-related, where our long-term earnings are higher than consensus. It's really critical to the process that I run and I think that's an area where we're finding real opportunities both within AI but also outside of AI. Abraham, we've talked to Jean-Bavain from the BlackRock Investment Institute this year. We talked to him about the 2026 outlook. One of the themes that he touched on was the diversification mirage this year, which is this concept of, it's hard to find diversification in today's environments. Maybe some of the asset classes you relied on in the past are not diversifying your portfolio as much as they used to. We started this conversation by talking about the S&P being at a historically unique moment in time, where it is very concentrated in some top name. How do you think about diversification when you're approaching the US equity market? I really like that term, diversification mirage. That really is such a great description of the US market today. We talked a lot about the market being so concentrated. When I think about investing over the last 15 years, so many of us have gotten so used to just buying the S&P. You can buy the S&P, you could own it for 10, 15 years. If you look at the last 15 years, the S&P is analyzed at about 13% of the year. Really incredible level of return. Just buying the S&P has been the absolute right decision. I look at where we are today and I look at the fact that the US market is so concentrated and I look at the fact that the opportunity set outside the current Mag 7 is more exciting than I think it's ever been. It was real opportunity to get differentiated exposure. You ask the question, "How do you do that?" That's what everyone's asking the question, "How do I do this?" It's really interesting. Some of our clients, for example, say, "Maybe we'll buy the equated S&P. You can get exposure to 500 companies equally weighted." That will get me diversified exposure. Not really. Actually, if you think about, I mentioned a $200 billion market cap company being 0.25% of the S&P in an equated index, that company's only 0.2% of this. You're not really getting more exposure to those really great innovative companies. There really is diversification in Mirage. I think there are real alternatives. I think the alternatives really back to active investing, taking real tracking error, taking real risk in your portfolio, but doing it in a way that is differentiated. Abraham, you've been a professional investor for over a decade, close to 15 years. I'm just curious in your day to day, what are some of the lessons that you've learned and the things that you try and do, especially when you're dealing with periods of market uncertainty? I have a front row seat to investing in the US market. I get to see the real excitement in the US market and the real opportunity in the US market. When you see the uncertainty, I think the price that we pay for the returns that we've been able to realize in the US market. We talked about 13% annualized returns over the last 15 years in a highly liquid market. To get those types of returns in a highly liquid market is really unheard of consistently, but the price that you pay is uncertainty and the price that you pay is volatility. I think that uncertainty and that volatility really creates opportunities. The more uncertainty it is as an active investor, the more excitement I have, because the more opportunities that I get to do what I do. I think there are three things that I try to hold myself to, just at a personal and a professional level. Number one, to always be intentional in everything I do. Number two, to really approach things with a mindset that avoids any sense of fear. I think you really can't be afraid and you always have to have a true north. I think number three is, look, I think we can't control what happens to us, especially in a volatile market, but you can control how you react to things. I think that is the most important thing, always having a process and a framework to ensure that you could react to things in the right way. I think it's really critical, both personally and professionally. Well, he breathed in the S&P as one of the most followed indices in the world. I think a lot of investors globally look closely at the S&P 500 because there are 500 companies as you mentioned, but one of the things that you've pointed out is that today there's a concentration in a handful of those names and there's a great opportunity to look in the other best of the rest as you've labeled them. So thank you for sharing those insights and some of the viewpoints that you have on these opportunities and thank you for doing it here on the bit. This was a lot of fun Oscar. Thanks a lot for having me. Thanks for listening to this episode of The Bit. If you've enjoyed our conversation, check out the episode with Carrie King, where she considers her stock picks for 2026. And make sure you subscribe to The Bit, wherever you get your podcasts. This content is for informational purposes only and is not an offer or solicitation. Reliance upon information in this material is at the sole discretion of the listener. In the UK and non-European economic area countries, this is authorised and regulated by the financial conduct authority. In the European Economic Area, this is authorised and regulated by the Netherlands Authority for the financial markets. The reference to the names of each company mentioned in this communication is mainly for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies. With all disclosures go to blackcroft.com/corpore/compliance/bid-disclosures.