Eleven companies dubbed the “Granolas” propelled European stocks to a record high this week, with their outsized contribution echoing the better-known “Magnificent Seven” in the US.
The crunchy acronym was coined by Goldman Sachs for pharma companies GSK and Roche, Dutch chip company ASML, Switzerland’s Nestlé and Novartis, Danish drugmaker Novo Nordisk, France’s L’Oréal and LVMH, the UK’s AstraZeneca, German software company SAP and French healthcare firm Sanofi.
In the past 12 months the group has accounted for 50 per cent of gains on the Stoxx Europe 600 index, which hit a new high on Thursday, and for about half of all mergers over the past five years.
The data suggests Europe is experiencing a similar phenomenon to the US, where fund managers are increasingly concerned about the narrowness of a rally led by tech companies such as Nvidia, which surged to a $2tn valuation on Friday.
“The big keep getting bigger,” said Peter Oppenheimer, Goldman’s chief global equity strategist and head of macro.
“This idea that you were getting significantly increased concentration in the US market has grabbed massive attention, but it’s also being reflected in other markets,” said Oppenheimer. He expected the Granolas to drive “nearly all” of the combined revenue growth of Stoxx 600 companies over the next few years.
The Granolas as a group have climbed 18 per cent over the past 12 months beating the Stoxx 600’s 7.5 per cent rise over the same period.
Over the past three years, the Granolas have performed in line with the US’s Magnificent Seven — a group of technology stocks comprising Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia — and with much lower volatility, though they have not kept pace over the past 12 months.
The Granolas are more diverse than the exclusive tech focus of the Magnificent Seven. The top performer in the past 12 months is Novo Nordisk, which has been boosted by investor enthusiasm over its weight loss and diabetes drugs, and is up 69 per cent.
The Granolas’ share of the Stoxx Europe 600 index has climbed to 25 per cent, approaching the Magnificent Seven’s 28 per cent weighting in the S&P 500. However, the European grouping, which has a combined market capitalisation of about $3tn, is dwarfed by its US peers, which have a combined value of around $13tn.
The Granolas are cheaper than the Magnificent Seven on an earnings multiple, trading at 20 times next year’s forecast earnings, compared with the Magnificent Seven’s 30 times. Both sets of companies are widely seen as having strong balance sheets and healthy margins, and — despite European companies’ reputation for focusing on dividends — invest similar shares of cash flow into research and development and capital expenditure.
Some market participants believe there is too much focus on the performance of the biggest companies, pointing out that major indices have long tended towards top-heaviness and that smaller stocks often perform even better.
“People are fixated on the size of these companies,” said Vontobel portfolio manager David Souccar. “[If] a small-cap compounds by 50 per cent over five years . . . It won’t create as much value as a [Granolas] or Magnificent Seven stock in absolute terms, but my return is better,” he said.
The US has become increasingly dominant among global equity markets since the financial crisis as near-zero interest rates lifted the valuations of tech groups with strong profit growth.
Over the same period, post-crisis regulation and a decline in oil prices from their 2008 peak knocked the banks and energy groups that form a large part of European bourses. “But now there are pockets of Europe that are doing very, very well,” said Oppenheimer.
Recent rises in interest rates have helped strengthen the position of the biggest companies to the detriment of cyclical and long-duration assets, according to analysts, as banks become more cautious about lending to smaller, supposedly riskier, borrowers.
Most analysts do not expect European and US markets to become less concentrated soon. They point to the rise of passive, index-tracking funds, which automatically pour money into the largest stocks.
Slowing economic growth could hurt smaller, lower-quality companies, although a so-called soft landing for the global economy may lead to a broadening out of the bull market.
“It’s very hard for me to see a trend reversal. The rise of passive investing is going to keep bloating [megacap stocks] up,” said Joachim Klement, head of strategy at broker Liberum.
But top-heavy indices could be vulnerable if the biggest companies start to disappoint investors’ high expectations, Klement added. When index heavyweights “screw up operationally, then things can turn sour quite rapidly”.
