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Nov 11, 2024
Magnificent Seven: Unstoppable Tech Giants or Risky Investments?
Did you know the "Magnificent Seven" name was intended as a warning, not a praise? It's worth exploring the potential risks and rewards of investing in these leading tech stocks.
Most investors are familiar with the term "Magnificent Seven" when discussing stocks. However, it might surprise you that this designation was initially more cautionary than complimentary. The concerns highlighted by Bank of America executive Michael Hartnett are becoming increasingly apparent.
What are the Magnificent Seven stocks?
This group of tech titans has significantly influenced the S&P 500 (^GSPC 0.38%) index in recent years.
Here's a useful acronym I created to remember the seven stocks soon after Hartnett popularized the term in May 2023: "MAMA ANT." While it may not have gained widespread acceptance, it helps me keep track. First, we look at the four software companies:
- Microsoft (MSFT -0.68%)
- Amazon (AMZN -0.89%)
- Meta Platforms (META -0.40%)
- Alphabet (GOOG -1.33%) (GOOGL -1.33%)
Then, we have the three hardware companies:
These seven companies, recognized for their expertise in artificial intelligence (AI) and electric vehicles, are key players in shaping the stock market.
Fast forward to November 2024, and these seven firms remain at the forefront of the market. They were among the largest American companies by market capitalization in early 2023, and now they stand as the top seven. Only two of them—Microsoft and Apple—have not performed as well as the S&P 500 since last May. The others have surged in value, contributing to the rise of the S&P 500 index.
What risks are associated with this group of powerful companies?
From the perspective of May 2023, Hartnett pointed out multiple risks connected to the Magnificent Seven stocks:
- He anticipated federal funds interest rates to exceed 4% (up from 0.8% back then) due to inflation control efforts. The rates, in reality, climbed up to 5.3% a few months later.
- The Magnificent Seven accounted for almost all the gains in leading market indexes in early 2023. While many S&P 500 stocks lost value during that spring, companies like Nvidia and Meta Platforms doubled in worth.
- These companies were already significantly large when the AI boom began, affecting the market indexes that are weighted by market capitalization, such as the S&P 500 and Nasdaq Composite. The Magnificent Seven now constitutes 32.2% of the S&P 500 index score, an increase from 27.3% in May 2023 and 20.1% at the end of 2022. Hartnett viewed the unbalanced nature of the market as a risk.
- Hartnett discussed a potential "baby bubble" within the AI sector in 2023. If any aspect of his predictions were incorrect, this could be it. AI could be a transformative long-term trend, or it could hold the risk of being the largest market bubble to date.
Michael Hartnett successfully identified a relevant stock group early on and gave it a memorable name, though he could have chosen other titles like "seven deadly sins" or "seven plagues" instead of something positive. The movie "The Magnificent Seven," featuring Yul Brynner and Steve McQueen, ends tragically with only three out of seven gunfighters surviving the conflict. This is a metaphor Hartnett echoes with his selection.
While it’s not accurate to claim that the leading stocks in the AI boom are doomed at this stage, it’s wise for investors to remain vigilant about the possibility of inflated valuations in this sector.
Thus, this concept was meant to sound an alarm rather than serve as an endorsement for investment.
How to approach the Magnificent Seven stocks today
Currently, the average S&P 500 stock has a price-to-earnings (P/E) ratio of 28.7 and a price-to-cash (P/C) ratio of 23.6. Among the Magnificent Seven, Alphabet and Meta Platforms are priced fairly, while Tesla and Nvidia appear overly expensive:
| Magnificent Seven Stock | P/E Ratio | P/C Ratio | Market Cap |
|---|---|---|---|
| 23.7 | 23.2 | $2.16 trillion | |
| 27.8 | 28.4 | $1.48 trillion | |
| 88.0 | 32.7 | $1.11 trillion | |
| 69.3 | 103.2 | $3.59 trillion |
Data current as of November 9, 2024. P/E Ratio = price-to-earnings ratio. P/C Ratio = price-to-cash ratio.
Importantly, leading market indicators are increasingly dependent on these seven companies, and their significance is growing. If issues arise with a company like Nvidia or Microsoft, it could impact the entire stock market. This is exactly the scenario that Michael Hartnett wanted to warn investors about around 18 months ago.
Hence, investors should be cautious and selective about their investments, even within popular sectors such as AI and electric vehicles. Diversification remains a crucial strategy to weather any market downturns while building long-term wealth. This is the core message conveyed by Michael Hartnett through his metaphor of the Magnificent Seven—while these rising giants looked promising in the spring of 2023 (and still do), they could eventually pose a risk to your investment portfolio.
Stocks, Investing, Tech