Nvidia and the Magnificent Seven probably make up too much of your high-priced index fund, especially when the S&P 500 is this expensive

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MW Nvidia and the Magnificent Seven probably make up too much of your high-priced index fund, especially when the S&P 500 is this expensive

By Philip van Doorn

Also: Viking Therapeutics and a push to transform weight-loss treatment, bitcoin hits $100,000, and tips for filling out the federal student-aid form

This week analysts at Goldman Sachs suggested that investors begin diversifying their stock portfolios.

Even if most of your money is invested in index funds, your portfolio might be less diversified than you expect it to be. Nvidia Corp. $(NVDA)$ alone makes up 7.2% of the $625 billion SPDR S&P 500 ETF Trust SPY, which tracks the S&P 500 SPX. And if we add Microsoft Corp. $(MSFT)$ and Apple Inc. $(AAPL)$ to the mix, we are up to 20.1% of the portfolio. If we round out the Magnificent Seven by adding Amazon.com Inc. $(AMZN)$, Alphabet Inc. $(GOOG)$, Meta Platforms Inc. $(META)$ and Tesla Inc. $(TSLA)$, the group makes up 31.7% of the SPY portfolio.

So an index-fund investor dedicated to the S&P 500 has nearly a third of their money tied up in seven companies.

Incredible gains for those stocks over recent years have pushed the S&P 500 to a high forward price-to-earnings ratio relative to historical averages. These ratios reflect current share prices divided by weighted aggregate consensus estimates among analysts polled by FactSet.

Here is a comparison of current forward P/E levels for the S&P 500, the S&P MidCap 400 Index MID and the S&P Small Cap 600 Index SML:

   Stock index          Forward P/E  Forward P/E one year ago  Forward P/E to 5-year average  Forward P/E to 10-year average 
   S&P 500                     22.0                      18.9                           110%                            120% 
   S&P MidCap 400              16.6                      13.6                           103%                            104% 
   S&P Small Cap 600           16.4                      12.7                           107%                            106% 
                                                                                                             Source: FactSet

The S&P 500 is the most expensive of the three, especially relative to its 10-year average forward P/E valuation.

Joseph Adinolfi looked at other valuation measures for the S&P 500 and found that by one of them, the large-cap benchmark hasn't been this expensive since the dot-com era that ended in the early 2000s.

Gordon Gottsegen explained individual investors' continued enthusiasm for stocks.

Mark Hulbert suggested that no investor should have more than 60% of their retirement money in stocks, based on decades of market performance data.

More: The S&P 500 is inflated by 25% because investors don't care about fundamentals

Viking may lead another transformation for weight-loss drugs

The biggest problems with the revolutionary GLP-1 weight-loss medications brought to market by Novo Nordisk $(NVO)$ and Eli Lilly & Co. $(LLY)$ are that they need to be injected regularly and are very expensive.

Viking Therapeutics Inc. $(VKTX)$ has had continuing success through several stages of trials for its oral GLP-1 weight-loss medication. Ciara Linnane has been covering this unfolding story: Here are the latest developments for Viking, including a new treatment for the liver disease MASH.

More healthcare coverage:

-- Here are four biotech stocks that could get a boost from Trump's new regulatory climate

-- Sage Therapeutics to end development of key therapy after a third trial failure

-- Pfizer taps oncology chief to map drug-research path amid pressure from activist Starboard

-- COVID-19 virus may have a surprising benefit - it might be able to shrink certain tumors

-- Hims & Hers' stock tumbles on Amazon's latest disruptive foray into healthcare

Nvidia reaction

Investors shrugged following Nvidia's latest earnings release late on Wednesday, sending the company's stock up 0.5% on Thursday. The dominant player in the market for graphics processing units being installed for data centers to support the development of generative artificial intelligence once again beat analysts' estimates and its own guidance for revenue and earnings, but to lesser degrees than it had during previous quarters. The numbers were still astounding, with quarterly sales of $35.08 billion increasing 17% from the previous quarter and 94% from the year-earlier quarter. The company reported a profit of 78 cents a share, up from 67 cents in the previous quarter and a split-adjusted 37 cents in the year-earlier quarter, according to FactSet.

Reaction to Nvidia's earnings:

-- Why Nvidia investors are missing the forest for the trees

-- After Nvidia's earnings, this is the most impressive feat

-- Nvidia continues its inevitable march to a $4 trillion stock-market valuation

Is it time to turn to dividend stocks?

It sure is, according to investors pouring money into exchange-traded funds that follow various strategies to provide income, as Christine Idzelis explained in this week's ETF Wrap newsletter.

ETFs feed an expensive stock market: Beware of the 'Ponzi funds' that are hiding in plain sight, says strategist

Good news for college students - and their parents

The Education Department has rolled out the annual Free Application for Federal Student Aid, beating its Dec. 1 deadline in a reversal of last year's fiasco, when system upgrades delayed this critical annual process.

It is still a tricky process, and Jillian Berman shared FAFSA tips for students and parents.

Related: Their student loans should have been canceled already. Now they fear it won't happen under Trump.

Bitcoin tops $100,000

The price of bitcoin (BTCUSD) briefly exceeded $100,000 on Friday, according to FactSet. That was up from $42,485 at the end of 2023. In this week's Distributed Ledger newsletter, Frances Yue explained how derivative trading action around the new iShares Bitcoin Trust IBIT was pointing to much higher prices for the virtual currency in 2025.

Retailers' surprises

Here is a summary of coverage for retailers' earnings reports this week, led by a nasty surprise but followed by some good ones:

-- Target CEO says 'consumers continue to spend cautiously' amid triple-miss earnings report

-- TJX boosted by strength in Europe, as retailer posts earnings beat and raises guidance

-- Lowe's CEO confident in retailer's ability to manage Trump tariffs after earnings beat

-- Gap says it picked up wealthier shoppers, and more market share, despite weak clothing demand

-- Ross says business is slower than before, and that it could have done better

Retirement and planning for it

This week in the Help me Retire column, Alessandra Malito considered what is known as the 4% rule for annual withdrawals from retirement accounts. She helped a man who was trying to decide whether or not he could afford 6% annual withdrawals.

In the Fix My Portfolio column, Beth Pinsker dug into rules for spousal Social Security benefits. What if your nonworking spouse is several years older than you are?

The Moneyist and control from beyond the grave

Quentin Fottrell - the Moneyist - helps MarketWatch readers by answering all sorts of questions about personal finance. Often these involve estate planning, and some of the scenarios can be difficult or bitter. This week he answered questions from a woman who is in her 70s and wishes to leave her estate to her daughter, while making sure her son-in-law can never touch the money even if her daughter dies first.

Nvidia and the Magnificent Seven probably make up too much of your high-priced index fund, especially when the S&P 500 is this expensive

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