Equity markets—led by the “Magnificent 7” mega-cap tech stocks—have enjoyed a blistering 2023. But as the S&P 500 has become incredibly top-heavy due to the dominance of these tech giants, is there cause for concern? Plus, learn more about the emergence of GLP-1 drugs in driving significant weight loss among patients and discover whether this trend is here to stay.

The S&P 500 has returned 17.6% through mid-November, significantly outpacing the average return of 8% per year (excluding dividends) over the past three decades. This performance has largely been driven by just a handful of stocks: the “Magnificent 7” (NVDA, MSFT, AAPL, GOOG, META, TSLA, AMZN). The Magnificent 7 are up 71% year-to-date, while the remaining 493 stocks that comprise the S&P 500 are up a modest 4%.

The S&P 500 Equal Weighted Index, which normalizes the impact of these very large weightings, provides a more accurate picture of how the average U.S. stock is performing. In most years, the S&P 500 and the S&P 500 EW Index tend to be tightly correlated. This has not been the case in 2023. Year-to-date, the S&P 500 EW Index has returned only 2.7%—trailing the S&P 500 by 14.9% and clearly indicating a lack of breadth in the market. If this trend continues through the end of the year, it will mark the second-largest margin of underperformance by the S&P EW Index in the last 30 years.

The outsized price movements of the Magnificent 7 have caused their aggregate weighting in the S&P 500 to grow to 29%—the largest weighting in over 40 years. This is distorting current market valuations. The S&P 500 price-to-earnings (P/E) ratio is 19x—above the 20-year average of 16x. On this basis, the market looks expensive. Upon closer inspection, we find that the P/E ratio of the Magnificent 7 has seen a significant expansion this year to 31x, while the rest of the market is only valued at 14x—cheap relative to historical averages.

Given this deeper look, we remain constructive on the stocks in our portfolios. We will not chase the valuations of today’s market leaders, but we will continue to find the future leaders of the market.

There may be a few more Thanksgiving leftovers this year—and a new class of appetite-suppressing weight-loss drugs known as GLP-1s may be to blame. You’ve probably seen Ozempic commercials for Type-2 Diabetes patients over the years. Recently, the FDA approved two drugs within this class of medicine specifically for weight loss.

GLP-1s have been around for years, but only recently were they discovered to trigger rapid weight loss. While much is still unknown about these drugs, recent studies have shown patients lost up to 25% of their body weight over a period of about one-and-a-half years. These drugs mimic the hunger-regulating hormone called GLP-1 to slow down your digestive tract, thus limiting hunger impulses.

Wall Street has been excited about the results to date. Some analyst estimates for this drug class are as high as $100 billion in annual sales by 2030. However, debate on the long-term impacts of GLP-1s continues. Some have questioned the long-term viability of these drugs given their negative side effects—mainly gastrointestinal in nature. Studies have shown that the quit rate on these medications is nearly 50% in the first year and up to 70% in the second year—leading to two-thirds of the lost weight being regained within one year. Furthermore, prohibitive costs and lack of insurance reimbursement will be an issue moving forward. Most insurance plans and Medicare do not cover weight-loss medication. Priced at nearly $16,000 per year, this would be a heavy out-of-pocket expense for individuals. In addition, Congress needs to enact legislation before Medicare covers these drugs for weight loss.

However, if these drugs prove successful, it could be a significant step in addressing obesity and the myriad of related diseases in the United States. Not only would their success significantly improve the physical health of Americans, but it could also provide an economic benefit, as well. The CDC estimates that the medical costs of treating obesity in the U.S. are currently over $170 billion annually.

As more research is devoted to GLP-1s, we will learn if this class of drugs is truly revolutionary. But based on their early success, some of us may be eating a lot less turkey and mashed potatoes this Thanksgiving.

We hope that you and your families have a safe and happy holiday season.

Best Regards,
The Sandhill Research Team

Disclosure: This has been prepared for informational purposes only and does not constitute, either explicitly or implicitly, any provision of services or products by Sandhill Investment Management. Sandhill Investment Management (“Sandhill”) is a registered investment advisor with the Securities and Exchange Commission that is not affiliated with any parent company. Third-party information in this report has been obtained from sources believed to be accurate; however, Sandhill makes no guarantee as to the accuracy or completeness of the information. All statements made regarding companies, securities or other financial information contained in the content are strictly the beliefs and opinions of Sandhill and are not endorsements of any company or security or recommendations to buy or sell any security. These investment strategies have the potential for profit or loss. For a full list of strategy recommendations for the preceding year, please email your request to compliance@sandhill-im.com.