According to Goldman Sachs’ chief strategist David Kostin, big tech stocks, known as the Magnificent 7, are presently trading at their lowest relative valuations in more than six years. Despite these companies outperforming on earnings, their valuation premium over the other S&P 500 stocks has decreased significantly.

Currently, the Magnificent 7 are trading at a forward P/E ratio of 28, versus 20 for the broader S&P 500. This 43% premium represents only the 30th percentile for the past decade, showcasing a notable decline from previous valuations.

Kostin highlighted that the median Magnificent 7 stock trades at a valuation discount compared to what fundamentals would suggest.

Earnings Strength vs Price Performance

Despite underperforming share prices recently, the group has shown impressive earnings growth for Q1, achieving 28% year-over-year EPS growth (excluding Nvidia, which has yet to report). This outpaces the broader index’s 9% growth, with a notable 16% beat, the largest since Q2 2021.

Such trends are confirmed by high-frequency earnings data tracking major earnings performance across the market.

Kostin predicts that the Magnificent 7 will continue to outpace the broader market in 2025 as the U.S. economy slows down. Higher interest rates are expected to disproportionately impact small and mid-cap firms due to weakened balance sheets.

However, he notes that the earnings gap is narrowing, conjecturing it might decrease from 32 percentage points in 2024 to only 2 points by 2026. Nevertheless, past patterns reveal that results have often outperformed expectations, suggesting potential for upward surprises.

Mid-Cap Stocks as Undervalued Opportunities

Even though mid-cap stocks face near-term challenges, Goldman maintains that they present significant long-term value. Historically, mid-caps have delivered faster earnings growth and superior risk-adjusted returns, while currently trading at discounted valuations compared to their larger counterparts.

As investors reassess their risk-reward framework, a shift towards quality mid-caps could gain traction, particularly if macroeconomic volatility persists into 2025.