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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EARLY GIFTING OF PART OF YOUR INHERITANCE
TO A FAMILY MEMBER
If you were to gift part of your inheritance early to a family member what concerns might you have? An estimated £5.5 trillion will be passed between generations over the next 30 years and the biggest concerns that come up are illustrated below For those looking for a bit more control and flexibility, let’s chat about how we can help
HALF-TIME: WINNERS AND LOSERS
The challenges of forecasting winners and losers can be futile – and I’m not talking about the Olympics here! It is interesting to note who is winning and who is behind at half-time in 2021 when it comes to investment returns from different assets. Who would have predicted commodities leading the way having finished in the relegation places in 8 of the last 9 years?
This is why we recommend a dependable long-term plan or framework for clients, ensuring effective diversification to meet individual objectives.
FINANCIAL RESOLUTIONS
WELCOME TO 2020! WHAT ARE YOUR PLANS FOR THE NEW DECADE
What does Wealth look like to you?
We all have different goals and aspirations in life
Cash is not king when it comes to long term goals
Source: Morningstar Investment Management calculation, Morningstar Direct data to 28 February 2019. Returns are month-end data points in GBP and normalised at 1 on 30 June 2016. Past performance is not a guide to future returns.
Given the recent string of events, I wanted to take this opportunity to comment on Brexit. Beyond the daily (or hourly) swings in prices, we can see UK company shares are up around 20.6% since the initial vote (in aggregate including dividends), UK corporate bonds are up 8.5% and cash has gone sideways. This can be seen in the chart above
So, looking backwards, it would have been a mistake to put your money under the pillow. Looking forward, it’s likely to be a mistake too. Here is an interesting thought - UK shares have beaten cash in every 20-year period in its history.
We normally recommend your savings are spread across many different assets and regions to diversify your returns and reduce risk —with the aim of meeting your own specific plans for the future.
