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.
The S&P 500 increased by 24.2% in 2023, of which the seven giants generated a 75.7% return.
Individually, this translated into Nvidia, +239%; Meta (formerly Facebook), +194%; Tesla, +102%; Amazon, +81%; Alphabet (formerly Google), +58%; Microsoft, +57%; and Apple, +48%.
Much of the optimism powered by hopes for artificial intelligence (AI).
2024 has been less kind.
The average increase for the Mag 7 was still a healthy 17% in the first quarter, compared with the 10% rise of the S&P 500, but the performance varied from Nvidia’s 82% increase to Tesla’s near 30% decline.
This has seen the doubters out in force.
The close of an investment cycle? A market craze?
The ride of the Magnificent 7 may be nearing an end, suggests 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.”
It goes on: “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.”
Some question whether the grouping still makes sense.
Could we instead be talking the Fantastic Four or maybe the Super Six.
Tesla in particular has been hard hit by sceptical consumer demand for electric vehicles and competition from China.
Of course, nobody is suggesting these companies have suddenly become basket cases.
The Bankrate organisation stated: “The mega-cap tech stocks have among the world’s strongest business models, with products used by billions of people in some cases. They have established businesses, deep financial resources and can continue to grow.”
Nevertheless, Tom Stevenson, of Fidelity, recently went so far as to comment: “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.”
Yet, despite comparisons, neither does he think the Mag 7 trend is going to blow up like the 2000 dotcom bubble.
He went on: “The Magnificent 7’s performance in recent years is only partly about rising valuations. It has been justified by superior earnings growth too.
So, I don’t think the fundamentals are enough to derail the Super Six or whatever we end up calling them. What might is the realisation by investors that interest rates are likely to stay higher for longer, in the US at least – particularly bad news for high-growth companies.
“That’s the main reason that the Magnificent 7 have paused for breath. The growth is still there; these are great companies, with the benefit of size and first mover advantage. It’s just that the future is more uncertain than we thought. And, quite rightly, that reduces how much we will pay to jump aboard.”
Even the Mag 7 cannot perform all the time.
As a general guideline, the recommendation is to limit exposure of any single stock to around 3-7% of a well-diversified portfolio to mitigate individual share volatility and concentration risk.