The Magnificent Seven's Ride May Be Nearing an End

Strategic Insights -

As investors, we've been riding the wave of the Magnificent Seven - a group of seven tech giants that have consistently delivered impressive returns. However, recent performance has been less kind, with some doubters suggesting that the run may be coming to an end. The S&P 500 increased by 24.2% in 2023, with the seven giants generating a 75.7% return. In contrast, the first quarter of 2024 has seen the average increase for the Mag 7 at 17%, with performance varying from Nvidia's 82% increase to Tesla's near 30% decline.

Key Takeaways:

  • The Magnificent Seven, consisting of Nvidia, Meta, Tesla, Amazon, Alphabet, Microsoft, and Apple, generated a 75.7% return in 2023, compared to the S&P 500's 24.2% increase.
  • The average increase for the Mag 7 in the first quarter of 2024 was 17%, with performance varying from Nvidia's 82% increase to Tesla's near 30% decline.
  • Investopedia suggests that investors need to be selective and focus on the fundamentals of individual companies rather than blindly investing in the group.
  • Some question whether the grouping still makes sense, with suggestions of alternative labels such as the Fantastic Four or Super Six.
  • Tesla has been particularly hard hit by skeptical consumer demand for electric vehicles and competition from China.
  • The Bankrate organization stated that the mega-cap tech stocks have among the world's strongest business models, with deep financial resources and the ability to continue growing.
  • Tom Stevenson of Fidelity notes that the fear of missing out (FOMO) has turned into fear of selling, with investors now asking if it's time to sell rather than buy.
  • The Magnificent 7's performance has been partly justified by rising valuations and superior earnings growth.
  • The likely increase in interest rates for longer may be a key factor in the Mag 7's recent pause, particularly bad news for high-growth companies.
  • A well-diversified portfolio should limit exposure to any single stock to around 3-7% to mitigate individual share volatility and concentration risk.

Statistics:

  • 2023 S&P 500 return: 24.2%
  • 2023 Magnificent Seven return: 75.7%
  • Q1 2024 Magnificent Seven return: 17%
  • Nvidia's return in Q1 2024: 82%
  • Tesla's return in Q1 2024: near 30% decline

Sources:

  • "The Magnificent 7: hot stocks which last year drove investor returns" - For those of a certain age the Magnificent Seven meant a classic 1960 Western starring Yul Brynner, Steve McQueen and Charles Bronson. For investors, rather than film buffs, the Magnificent Seven are Mag 7, "hot stocks" which last year drove investor returns such that it was like banking on a cert.
  • Investopedia: "That means investors need to be selective in ways that weren't required last year, when a bet on the Mag 7 as a whole was a winning strategy."
  • Investopedia: "The notion that that group will uniformly sustain the market is proving to no longer be a winning proposition. "Instead, it's time for investors to do their homework and look at the fundamentals of the companies they are choosing to invest in rather than blindly trusting the seven to keep sustaining markets higher."
  • Bankrate: "The mega-cap tech stocks have among the world's strongest business models, with products used by billions of people in some cases."
  • Fidelity's Tom Stevenson: "Only a few weeks ago, a key question for investors was: 'have I still got time to buy into the Magnificent 7?' "Fear of passing up the stellar returns delivered by America's leading tech stocks was palpable. Now we're all asking: 'is it time to sell'? Not fear of missing out, just plain old fear."