Forget the Magnificent 7 – Why You Should Invest in Europe’s Fantastic 5

The U.S. is not the only place to find market-beating companies. Investors know the “Magnificent Seven” – mega-cap tech stocks that powered recent U.S. market returns. We argue that now is the time to consider their unsung European equivalents, which we dub the Fantastic Five. Like the Mag Seven, the Fantastic Five have delivered robust market-beating returns.

Let’s compare the Fantastic Five and Magnificent Seven (Mag 7) on performance, resilience, growth, and valuation. On most measures, as we’ll see below, the Fantastic Five match or surpass the Magnificent Seven. As such, investors should take the time to familiarize themselves with these impressive companies.

First Dimension: Performance

Unsurprisingly, the European Fantastic Five and U.S. Magnificent Seven have beaten the market as they are leaders within their respective industries, generate excellent returns on capital, and have delivered superior revenue growth. They have earned their stellar reputations. But when compared head-to-head, the European Fantastic Five have delivered better results to investors—with less risk.

We evaluated the performance of both portfolios from December 2021 through the end of the third quarter of 2024. This period of almost three years includes an aggressive interest rate hiking cycle from both the U.S. Federal Reserve and the European Central Bank beginning in 2022, as well as a rebound in equity markets in 2023 and 2024.

Over that period, the Fantastic Five portfolio returned 30%, and the Magnificent Seven portfolio returned 54%[1]. The chart below shows that the Fantastic Five exhibited much better downside protection in the 2022 market correction, highlighting greater diversification and resilience.

Fantastic 5 Performance Has Been More Consistent versus the Magnificent 7

How did these leaders compare to their benchmarks? Over the full period, the Fantastic Five beat the MSCI Europe Index by 11%. The Magnificent Seven also beat its benchmark, the MSCI United States Index, by 23%. So while both portfolios outperformed their respective indexes, the Magnificent 7 delivered better overall performance, but with more volatility.

Fantastic 5 Has Generally Outperformed Its Benchmark by a Wider Margin than the Magnificent 7

Additionally, failing to own the Mag 7 was more costly to U.S. investors than failing to own the Fantastic Five for international investors. Why? Because the Mag 7 stocks made up a greater share of the starting index weight. As of December 31, 2021,  the seven U.S. stocks represented 25% of the total U.S. index versus the five European stocks, which only comprised 10% of their index. So the Mag 7’s performance contribution effect was more considerable because returns were delivered on a larger starting market weight.

This mega-cap weighting is one reason why the Mag 7 rose to prominence in the first place when their AI-fueled rally caused investors who did not own them to lick their wounds. Similarly, suppose the Fantastic Five continue to outperform the European markets. In that case, they will grow to be a more significant part of the index, creating a greater headwind for investors who do not own them.

Winner for Historical Performance: Magnificent Seven

Second Dimension: Resilience

Let’s dig into how the Fantastic Five protected capital better than the Magnificent Seven during 2022’s market correction. The Fantastic Five portfolio had a maximum drawdown of 18% versus the Mag 7’s 40% drop. This resilience may result from somewhat lower starting valuations and greater diversification.

Despite being just five names versus seven, the Fantastic Five are a more diverse grouping than the Mag 7, which is concentrated in technology-related industries. The U.S. cluster is heavily tied to the prospects for artificial intelligence (“AI”), which helped power their roaring comeback in 2023 as new AI technology was all the rage. In contrast, the European leaders have diverse sources of growth, which include AI but also GLP-1 drugs, luxury goods, advanced pharmaceuticals, and mission-critical enterprise software.

The Fantastic 5 Are a More Diversified Set of Companies and Less Reliant on the Information Technology Sector

The resilience of the Fantastic Five is also evident in the geographic composition of revenue. They are less concentrated in the U.S. and have a more globally balanced sales mix than their American peers. The Magnificent Seven, on average, generate about 50% of their revenue in the U.S., their home market. By contrast, the Fantastic Five generate 23% in their home market of Europe, 33% in the U.S., and 44% in other international markets.

Winner for Market Resiliency: Fantastic Five

Third Dimension: Growth

The Magnificent Seven has historically delivered faster earnings growth, principally driven by NVIDIA’s explosive growth due to AI chip demand. But markets are forward-looking: what matters is the future, not the past. On this basis, the Fantastic Five compare favorably.

The Fantastic Five are expected to outgrow the Magnificent Seven going forward. Consensus expects the Fantastic Five to grow earnings at 16% per year over the next three years, compared to 15% for the Magnificent Seven. The stronger earnings growth for the Fantastic Five is driven by Novo Nordisk’s first-mover advantage in the fast-growing market for GLP-1 diabetes and obesity drugs, booming demand for ASML’s leading-edge lithography equipment needed to produce AI chips, and accelerating earnings growth as SAP completes a successful cloud transition.

Expected Earnings Favor the Fantastic 5 Over the Magnificent 7

While both groups boast impressive growth rates, illustrating the promising outlooks for these companies, the Fantastic Five takes the crown.

Winner for Projected Earnings Growth: Fantastic Five

Fourth Dimension: Valuation

On the final dimension, the Magnificent Seven wins by a hair. They are marginally cheaper on 2024 consensus estimates, trading at 31x forward earnings versus the Fantastic Five’s 32x. This is only a minor advantage for the U.S. leaders. Because the Fantastic Five have more robust expected earnings growth over the coming years, their P/E multiples fall faster, such that they are trading at parity on 2025 estimates and at a discount beyond[2].

Forward P/E Multiples Favor the Magnificent 7 in the Short-Term

Winner for Current Valuations: Magnificent Seven

Conclusion

Market concentration has dominated the headlines in the U.S. in recent years. Although less well-known, this phenomenon is not unique to U.S. markets, as Europe has its own crop of companies that have powered the returns of the local index. They will significantly contribute to international market returns if they continue to outperform. American investors who are adding an international allocation for its diversification benefits should consider these global leaders. Dominating their respective markets and with attractive fundamentals, they fully merit the label the “Fantastic Five.”

[1] Based on prices and consensus earnings estimates at 9/30/24

[2] Performance based on total returns (including dividends) in local currency terms. Portfolios weighted by market capitalization as of September 30, 2024.