The Magnificent Seven Is Probably Breaking Up. Investors Should Learn From It

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The Magnificent Seven Is Probably Breaking Up. Investors Should Learn From It

If you had money invested in 2023, chances are good that you did pretty well. And chances are also good that your doing well had something to do with the so-called Magnificent Seven — a group of giant U.S. companies whose stocks shot up in tandem. The M7 stocks, as we’ll call them, were responsible for more than 60% of the S&P 500’s growth in 2023, grew by 107% on average, and got mentioned about a billion times on CNBC. But now it’s looking like some of the stocks in the group might be heading in different directions. Let’s take a look at what’s happening and what it teaches us about the stock market.

Where did the Magnificent Seven come from, anyway? 

The term “Magnificent Seven” was coined in May 2023 by Bank of America’s Michael Hartnett to describe seven high-growth tech and tech-adjacent companies — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — that were benefitting from the hype around generative AI. As these companies’ stocks kept rising, the Magnificent Seven nickname caught on.

So what’s the problem? 

Wall Street loves giving nicknames to groups of stocks that don’t have much in common except that they’re hot. In the ’60s and ’70s, there was the Nifty Fifty, a collection of companies that were as diverse as Coca-Cola, Xerox, and Pfizer. More recently, we got FAANG (Facebook, Apple, Amazon, Netflix, Google), which became shorthand for “big tech” — never mind that Amazon is, at its core, a retail company and Netflix is a subscription entertainment service. The fact that all these companies were doing well at the same time didn’t necessarily speak to anything their businesses had in common.

Something similar happened with the Magnificent Seven. While they have all been successful, they’re not equally positioned to profit from AI, and they make money in different ways: Nvidia designs computer chips; Meta and Google generate most of their revenue from advertising; Apple sells phones and now goggles; Tesla makes electric cars. And now, after a booming 2023, these companies are facing headwinds or enjoying tailwinds particular to their specific business, and this has pushed their stocks in different directions.

Which directions, exactly?

Nvidia and Meta (which are up 51% and 37% YTD, respectively) are benefitting from optimism around AI (and, in Meta’s case, a hot ad market). On the other hand, Apple (-2% YTD) is suffering from a China slowdown, and Tesla (-20% YTD) is getting undercut by BYD. The others are somewhere in the middle.

So what’s the takeaway here?

Don’t take hype too seriously, whether it’s for dogecoin, Enron’s innovations in the derivatives market, or a group of tech-related stocks that are all doing well at the same time. Getting swept up in such hype can be costly: stock funds that gain 100% or more in a single year have tended to lose money in the years that follow. 

Successful stock pickers worry less about nicknames and clusters of hot stocks than the fundamentals of individual companies’ businesses. Still, they can get blindsided by things like a government banning the use of a company’s products, which happened to Apple. Such unforeseen developments are partly why most pro stock pickers fail to beat the broader market. Index funds, on the other hand, spread money around widely so that investors benefit from growth wherever it happens to pop up, which helps explain why historically diversified, low-cost index funds have done so well.

That’s a roundabout way of saying: if you want to take a more active hand in managing your own money, filling a portfolio exclusively with the names that show up most in the news is probably not the best way to go about it.

Photo credit: New Line Cinema

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