AAGMM and Concentration
When the Biggest Companies Are the Cheapest
We've become extremely aware of concentration and apparently every manager has become an expert on market microstructures and managing index concentration risk. (This is despite most managers running more concentrated portfolios than the index...)
Let's challenge the concentration narrative and focus on the fundamentals.
Every active manager I speak to is underweight the Mag-7. Every single one. That in itself is a wild data point, lends to the idea that at some point there will be capitulation.
For the purposes of this exercise, I'm going to isolate it to five companies rather than the Mag-7, the "AAGMM": Apple, Amazon, Google, Meta, and Microsoft. I'm excluding Tesla because it is meme stock and not a pure-play tech company, and Nvidia which is a supplier to these businesses and downstream to their primary revenue streams.
What I want to understand is whether these five companies, which utterly dominate every conversation about concentration risk, are actually expensive relative to the market they're supposedly distorting.
The Numbers
No.
AAGMM's forward PE ratio, market-cap weighted, is sitting at approximately 22.8x. The S&P 500's forward PE is running at or above that level.
Read that again: the five largest, most profitable, most cash-generative companies in the world are trading at a discount to the index they dominate. On a trailing basis, the picture is similar with AAGMM trailing PE at approximately 24.1x, broadly in line with or below the wider market.
Strip out the market-cap weighting distortion (removes the Apple effect) and look at the simple average of all five stocks, forward PE of approximately 22.3x, trailing PE of approximately 24.5x. Across the board, these businesses are not expensive relative to the market.
The concentration ratio panel shows AAGMM at roughly 22% of S&P 500 market cap, a number has plateaued over the last 3 years. And the rolling 12-month change in concentration has actually been falling! Everyone is screaming about concentration risk, but the concentration itself has stabilised.
None of this stuff is trading on fundamentals right now. It is trading on narrative.
The Setup
I'm not saying buy tech. But it is definitely cheaper than the rest of the market, and the rest of the market doesn't generate anywhere close to the same free cash flow. Don't give me AI Capex argument, if they wanted to, it could be turned off instantly.
These stocks have been sold off, so if the geopolitical situation (Iran, oil, tariffs, choose your adventure) resolves even partially, you get convexity. These would be among the primary beneficiaries of a sentiment reversal because they've been the most aggressively de-risked by active managers who are all underweight and all telling the same story about concentration risk.
And if it doesn't resolve? Then these companies print cash money. Apple, Microsoft, Google, Amazon, and Meta are not going to stop generating revenue because oil is at $100 or because there's a war in the Middle East. Cash generation remains remarkably resilient to exactly the kind of macro scenarios that are depressing their valuations.
The asymmetry is fascinating and not a bad risk-reward relative to the alternatives in this market.
The question for allocators is not whether to overweight tech it's whether the underweight that every active manager is running is actually justified by the fundamentals, or whether it's a positioning artefact of a narrative about concentration that the data doesn't support at all.
Absolutely not suggesting to go overweight tech but rather to question whether the underweight that every active manager is running is actually justified by the fundamentals. Or whether it's a positioning artefact of a narrative the data doesn't support.