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Eleven companies nicknamed “Granolas” have pushed European stocks to record highs this week, with their outsized contribution echoing the better-known “Magnificent Seven” in the United States.
The acronym was coined by Goldman Sachs for the pharmaceutical companies GSK and Roche, the Dutch chip company ASML, the Swiss Nestlé and Novartis, the Danish pharmaceutical manufacturer Novo Nordisk, the French L’Oréal and LVMH, the British AstraZeneca, the German software company SAP and French healthcare company Sanofi. .
Over the past 12 months the group has accounted for 50% of the gains in the Stoxx Europe 600 index, which hit a new high on Thursday, and about half of all mergers in the past five years.
Data suggests Europe is experiencing a similar phenomenon to the United States, where fund managers are increasingly concerned about the narrowness of a rally led by tech companies like Nvidia, which rose to a $2 trillion valuation on Friday of dollars.
“The big guys just keep getting bigger,” said Peter Oppenheimer, Goldman’s chief global equity strategist and head of macro.
“The idea of greater concentration in the US market has attracted enormous attention, but it is also reflected in other markets,” Oppenheimer said. He expects Granola to drive “almost all” of the combined revenue growth of the Stoxx 600 companies in the coming years.
Granola as a group has risen 18% over the past 12 months, beating the Stoxx 600’s 7.5% rise over the same period.
Over the past three years, Granola has performed in line with the US Magnificent Seven – a group of technology stocks that includes Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia – and with much lower volatility, although not have kept pace. in the last 12 months.
Granola is more diverse than the exclusive technological focus of the Magnificent Seven. The best-performing stock over the past 12 months is Novo Nordisk, which has been buoyed by investor enthusiasm for its weight-loss and diabetes drugs, and is up 69%.
Granola’s share of the Stoxx Europe 600 index rose to 25%, approaching the Magnificent Seven’s 28% weight in the S&P 500 index. However, the European group, which has a combined market capitalization of around $3 trillion , is dwarfed by its US counterparts, which have a combined value of around $13 trillion.
Granola is cheaper than the Magnificent Seven in terms of earnings multiples, trading at 20 times next year’s expected earnings, compared to 30 times for the Magnificent Seven. Both groups of companies are widely seen as having strong balance sheets and healthy margins, and despite European companies’ reputation for focusing on dividends, they invest similar shares of cash flow in research and development and capital expenditure.
Some market participants believe there is too much focus on the performance of larger companies, pointing out that major indexes have long trended toward a high and that smaller stocks often perform even better.
“People are fixated on the size of these companies,” says David Souccar, portfolio manager at Vontobel. “[If] a small-cap company is compounded 50% over five years. . . It won’t create as much value as a [Granolas] or Magnificent Seven shares in absolute terms, but my return is better,” he said.
The United States has become increasingly dominant among global stock markets since the financial crisis, as near-zero interest rates have boosted valuations of technology groups with strong profit growth.
Over the same period, post-crisis regulation and the decline in oil prices from their 2008 peak have taken a toll on the banks and energy groups that make up much of Europe’s stock markets. “But now there are pockets of Europe that are doing very, very well,” Oppenheimer said.
Analysts say recent interest rate rises have helped strengthen the position of larger companies at the expense of cyclical and long-duration assets, as banks have become more cautious about lending to smaller, presumably riskier borrowers.
Most analysts do not expect European and US markets to become less concentrated anytime soon. They point to the rise of passive, index funds, which automatically pour money into larger stocks.
Slowing economic growth could hurt smaller, lower-quality companies, although a so-called soft landing for the global economy could lead to a broadening of the bull market.
“It’s very difficult for me to see a turnaround. The rise of passive investing will continue to grow [megacap stocks] up,” said Joachim Klement, head of strategy at broker Liberum.
But heavier indexes could be vulnerable if larger companies begin to fall short of investors’ lofty expectations, Klement added. When index heavyweights “fail operationally, things can get worse quite quickly.”