Magnificent Expectations
Market prices reflect what investors expect to happen in the future. When a group of stocks delivers returns far above the broad stock market, it’s likely these companies surprised investors in a good way.
This principle is challenging to uncover in the data because the market’s expectations are hard to quantify, even with the benefit of hindsight. Sure, we can compare a company’s reported earnings against what was forecast by analysts. But there’s dispersion in analysts’ forecasts. And sometimes earnings reports are accompanied by messaging from the company about its future business that impacts prices. So, a company can beat its earnings forecast and still experience a price decline.
All that said, sometimes we see strong indicators of earnings surprises. Recent years for the Magnificent 7 stocks are a good example. From 2021 through 2025, aggregate earnings for these companies exceeded average beginning-of-year expectations in all but one year, 2022. Their stocks outpaced the broad market in all but one year. I bet you can guess which year they underperformed.
Obviously, we don’t yet have 2026 results. But forecasted earnings for the Mag 7 are even higher this year. That means a potentially higher bar these companies must clear such that they can deliver outsized returns
If you'd like to discuss how these themes relate to your own financial planning objectives, and to assess whether your portfolio is appropriately diversified rather than overly concentrated in the Magnificent Seven, please feel free to get in touch.
Risks : Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at anytime. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance.
In USD. Source: Dimensional and FactSet, calculated by Dimensional. The Magnificent 7 stocks are represented by Tesla, Meta, Alphabet, Amazon, Nvidia, Apple, and Microsoft. Magnificent 7 Returns are a weighted average of the seven companies. Beginning of Year Earnings Forecast is the sum of average next 12-month net income analyst estimates for each Magnificent 7 stock as of December 31 of the prior year. End of Year Earnings is the sum of actual reported trailing 12-month net income for each Magnificent 7 stock as of December 31 for the stated year. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
S&P data © 2026 S&P Dow Jones Indices LLC, a division of S&P Global.
Risks : Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at anytime. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. The views expressed here are subject to change without notice and we can’t accept any liability for any loss arising directly or indirectly from any use of it.
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Value vs Growth
Historically, value stocks have outperformed growth stocks in the US (the largest stock market in the world) often by a striking amount. Data covering nearly a century backs up the notion that value stocks—those with lower relative prices—have higher expected returns.
While disappointing periods emerge from time to time, the principle that lower relative prices lead to higher expected returns remains the same. Value premiums have often shown up quickly and in large magnitudes. For example, in years when value outperformed growth, the average premium was nearly 15%. On average, value stocks have outperformed growth stocks by 4.0% annually in the US since 1927, as Exhibit 1 shows.
A consistent focus on value stocks is essential to capturing these outsize value premiums when they appear. Value investing is based on the premise that paying less for a set of future cash flows is associated with a higher expected return. That’s one of the most fundamental tenets of investing. Logic and history support a commitment to value stocks so investors can be positioned to take part when those shares outperform in the future.
Risks:Buying investments can involve risk. The value of your investments and the income from them can go down as well as up and is not guaranteed at any time. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance.
Fama/French Indices: The Fama/French indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.
Currency and Premiums: In US dollars. Yearly premiums are calculated as the difference in one-year returns between the two indices described.
Value Minus Growth: Fama/French US Value Research Index minus the Fama/French US Growth Research Index.
Fama/French US Value Research Index: Provided by Fama/French from CRSP securities data. Includes the lower 30% in price-to-book of NYSE securities (plus NYSE MKT (formerly AMEX) equivalents since July 1962 and Nasdaq equivalents since 1973).
Fama/French US Growth Research Index: Provided by Fama/French from CRSP securities data. Includes the higher 30% in price-to-book of NYSE securities (plus NYSE MKT (formerly AMEX) equivalents since July 1962 and Nasdaq equivalents since 1973).
Backtested Performance: Results shown during periods prior to each index's inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.
GLOSSARY
Value Stock: A stock trading at a low price relative to a measure of fundamental value such as book equity.
Growth Stock: A stock trading at a high price relative to a measure of fundamental value such as book equity.
Value Premium: The return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).
Risks : Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at anytime. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. The views expressed here are subject to change without notice and we can’t accept any liability for any loss arising directly or indirectly from any use of it.
To discuss your financial requirements or obtain other information click below
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Outpacing Inflation with Stocks
Inflation is back in the news of late, as the year-over-year change in the consumer price index is at the highest level since 2023 in the US which is the worlds largest economy. This may stoke fears of further inflation for many investors.
It’s important to note that expected inflation is incorporated into the expected returns demanded by market participants. To the extent inflation is expected to impact either future cash flows from an investment, or the discount rate applied to these cash flows, market prices adjust to compensate, resulting in positive expected real returns. This is borne out in historical data. Average real returns for the broad US stock market, based on the S&P 500 Index, have been positive even in years when US inflation was above the historical median. Average real returns for US small cap and small cap value stocks have been even higher, implying investors should not shy away from tilting toward higher expected return stocks even if inflation expectations are elevated.
We believe one way for investors to deal with inflation is to outpace it. Stocks have been a good way to do this historically, as the evidence from the US illustrates.
To review the diversification of your own investments feel free to get in touch.
In USD. US inflation is the annual rate of change in the consumer price index for all urban consumers (CPI-U, not seasonally adjusted) from the US Bureau of Labor Statistics. Nominal return is the rate of return on an investment without adjusting for inflation. Real return is the rate of return on an investment after adjusting for inflation. Real returns are calculated using the following method: [(1 + nominal return) / (1 + inflation rate)] – 1. The Dimensional indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment.
See “Index Descriptions” in the appendix for descriptions of the Dimensional index data.
S&P data © 2026 S&P Dow Jones Indices LLC, a division of S&P Global. Indices are not available for direct investment.
Risks : Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at anytime. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. The views expressed here are subject to change without notice and we can’t accept any liability for any loss arising directly or indirectly from any use of it.
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Will the Magnificent 7 Stay on Top
The Magnificent 7 entered 2025 among the Top 10 largest US stocks. But before making an outsize bet on gains from these technology giants, investors should consider a few lessons from market history.
- It’s hard to stay on top. For example, only three of the 10 biggest companies from 1980 made the 2000 list—and none of them was in 2025’s Top 10.
- Industries ebb and flow. Technology-focused firms currently dominate the list. But in 1980, six of the 10 largest companies were in the energy sector.
- New technology doesn’t benefit only tech firms. Throughout history, companies across industries have used technology to innovate and grow.
Diversification enables investors to share in the success of today’s top companies while staying positioned to benefit from tomorrow’s market leaders.
The Magnificent 7 stocks are Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.
Source: Dimensional, using data from the Center for Research in Security Prices and Compustat. Includes all US common stocks. Largest stocks identified at the end of the calendar year preceding the respective period by sorting eligible US stocks on market capitalisation using data provided by the CRSP, University of Chicago.
Risks : Buying Investments can involve risk. The value of your Investments and the income from them can go down as well as up and is not guaranteed at anytime. You may not get back the full amount you invested. Information on past performance is not a reliable indicator for future performance. This information is intended for educational purposes and should not be considered a recommendation to buy or sell a particular security. The views expressed here are subject to change without notice and we can’t accept any liability for any loss arising directly or indirectly from any use of it.
To discuss your financial requirements or obtain other information click below
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UK INFLATION AND INTERET RATE EXPECTATIONS
I am sure you are likely aware of the Bank of England increase to interest rates from 2.25% to 3% yesterday.
We are often asked about Interest rate expectations given that many of our clients have mortgages.
It may be somewhat reassuring that the Bank of England expect key measures of inflation to fall moving forward.
Here a few interesting graphs:
Source: Bank of England
The UK is not alone in tackling inflation/interest rates
as can be seen here:
