How Long Will the Magnificent Seven Last?

(Editor’s note: We asked leading wealth managers:  Will the magnificent 7 technology stocks continue to lead the market going forward?  Their answers follow.)

Win Smathers, Shorebridge Wealth Management 

I wouldn’t bet against the tech juggernauts continuing to lead the broader market despite having extended valuations.  These seven names; Meta, Amazon, Nvidia, Microsoft, Alphabet, Apple and Tesla are proven innovators and very well positioned to benefit from artificial intelligence spending and implementation across their platforms.   The mag 7 collectively performed amazingly well in 2023 but have come back to Earth this year with only Meta, Amazon and Nvidia continuing a torrid climb.   The key advantage these companies have is they can grow revenue even when the economy withers.   

Alison F. Wertz, Bill Few Associates,

The history of the stock market is littered with great companies that are no longer kings.  Think back to IBM, AT&T, GE, GM, Exxon, etc.  At one time all of them were the best of the best.  When I started working in the financial services industry in 1996, AT&T was one of those companies many people owned and never wanted to sell. From 1985 to 1999, the stock had outperformed the S&P 500 by nearly 200% with a return of 800%. Since 1998, the stock has lost 50% of its value while the diversified S&P has returned over 250%. In hindsight this isn’t surprising considering when I was in college, I would sometimes have long distance phone bills in the $100s of dollars. Now I can Zoom with my clients in Europe for free.  The point being, one or two of the Magnificent seven may continue to lead the market, for a while, but capitalism breeds competition and change, nobody stays on top forever.

Tim Rice, Smithfield Trust 

Smithfield’s strategy focuses on flexibility in its approach to capturing the next handful of stocks driving market returns.  As market dynamics and the effects of artificial intelligence evolve over time, the current “winners” will inevitably be displaced.  By adhering to a disciplined investment process and aggressively capitalizing on market opportunities, we believe our customers are provided with the best opportunity for success.

David Root, Jr., DBR & CO

Because these seven stocks comprise about 30% of the S&P 500, they will continue to have an outsized influence on the direction of markets going forward—whether that direction is up, down, or sideways—simply because of how the index is constructed. That said, we do expect more broad-based participation from the other companies in the index—and in other markets—moving forward, as we have seen over the past few months. Earnings and margin estimates for 2024 are constructive, and that is not only a function of the Magnificent Seven. Although these companies may continue to lead in terms of their contribution to earnings, we suspect any resulting market response will be more muted than it was in 2023 given where valuations are today. The other companies in the index, however, are trading at much more subdued valuations, so a healthy year of earnings could help them make up ground relative to the Magnificent Seven.

Linda Duessel, Federated Hermes

The fortunes of the Magnificent Seven have already diverged. Work from home and changes in how we buy goods and consume media continue to benefit these firms, but the leadership baton should pass to more cyclical sectors as the year progresses. This resilient economy defies recession calls; therefore, Financials, Materials, Health Care and Industrials should catch up as the market’s rally broadens. 

Olu Omodunbi, Huntington National Bank 

We are skeptical that these 7 stocks will each be leaders in their own right going forward, at the very least because all of these stocks saw stellar 2023 performances that took their valuations to pretty heady levels – stocks “work” best when investors are surprised by how good things are, and no one is going to be surprised by how strong business is at NVDA or MSFT. Indeed, we are already seeing a divergence in performance this year, and we view exposure to the AI mega-currents as a more important stock driver going forward than belonging to a somewhat-disparate group of 7 stocks.

Beth Genter, Schenley Capital 

The Magnificent Seven—Apple, Amazon, Google, Facebook, Microsoft, Nvidia, and Tesla—are poised to maintain their industry dominance through relentless innovation. Their staggering market capitalization and profound market influence ensure continued leadership in the S&P and NASDAQ indexes. These companies stand as paragons of innovation, with their products and services woven into the fabric of daily life for individuals and businesses alike. Their substantial resources enable ongoing research and development, driving the creation of groundbreaking products.

Amazon’s Bedrock platform, a pinnacle of AI cloud technology, empowers businesses to build cutting-edge applications securely. Nvidia’s unparalleled 3D chips power a vast array of technologies and AI systems, solidifying their role as an industry frontrunner. Tesla revolutionizes transportation with its pioneering electric vehicles, while Apple sets the standard for cutting-edge consumer electronics.

Each of these titans excels in their respective fields, profoundly impacting every facet of society—from economy and governance to everyday life. If they continue to innovate, the Magnificent Seven will remain at the forefront of technological advancement, shaping the future for generations to come.

Loyd J. Johnson, First Commonwealth Advisors  

One of the most asked questions for 2024 revolves around the continued leadership of the Magnificent 7 stock performance, which represented two-thirds of the return of the S&P 500 in 2023.  Last year, artificial intelligence was a major force behind the stock returns of these companies.  This year, however, results are needed to justify the high valuations.  Stock prices are always vulnerable to pullbacks after a major rally and failing to meet earnings expectations could be a trigger.  So far, they have continued to deliver, with upward earnings revisions of 5% compared to a decline of 1.7% of the S&P 500 (per Fact Set).  What also must be considered for 2024 is the prospect of The FED engineering a “soft landing” and the potential of declining interest rates.  The mere mention of this in the last two months of 2023 led to a rally in the other 493 stocks of the S&P 500, as well as Small and Mid Cap stocks.  This rotation is continuing in 2024.  Moreover, two of the seven, Tesla and Apple, are posting significant declines in 2024.  Due to the size of the Magnificent 7, they will always have a large effect on a capitalization weighted index like the S&P 500.  On an absolute return basis, 2024 should see an expanded set of investment opportunities.

Joseph A. Scarpo, CAPTRUST

The answer to this question is largely dependent on the period being measured. Here’s an example: In October 1999, Microsoft was the most valuable U.S. company, as defined by its stock valuation. But its stock price fell over time and did not return to this historical high until 2016. The company was always great. Its stock was not. The Magnificent Seven may or may not lead the markets higher. Regardless, it is the broader markets that deserve the most attention. Investors should start by defining their objectives and establishing their investment policies, then invest in a way that achieves those goals. A typical investor desires a risk-adjusted return that beats inflation. Most are unwilling to accept extreme volatility, and many will react with fear when volatility occurs. As professional investment managers focused on assisting clients in achieving their individual goals, we position our portfolios to respond to those investor needs and goals. As of April 1, 2024, the three-year return for Amazon is flat despite a 12-month return of nearly 83%. Our brains are wired to remember the most recent past more vividly than the distant past, a cognitive tendency called recency bias. Investor focus on the Magnificent Seven is one example. We can fight this tendency by remembering that questions like this are always answered in the same way—it depends on when you want to measure. 

Matthew George, PNC Private Bank

Strong tech companies will continue performing with good revenue growth and outstanding profitability, but there is always the risk that they might not meet lofty expectations of investors. The number of magnificent stocks already seems to have dwindled, which tends to be the fate of acronyms and categorizations in financial markets; they always have a limited shelf life. We will have to keep an eye on how they are trending in coming quarters. We also expect good performance to broaden beyond the tech sector as the recent momentum in tech slows and the broader economic landscape continues to shift.

Dan Eye, Fort Pitt Capital Group

First, the dominant outperformance of the Magnificent Seven stocks hasn’t been a fluke. It’s been justified by their superior fundamentals. Over the past five years, the Mag 7 stocks have delivered much higher revenue growth, earnings growth, and profit margin expansion compared to the other 493 components of the S&P 500 Index. Last year was a great example of this dominance. The Mag 7 posted an impressive 33% earnings growth rate, while earnings were down 5% across the rest of the index components. No wonder they dramatically outperformed everything else in 2023. 

Despite the Mag 7’s solid fundamentals, our early year call for 2024 was for a broadening of participation across market sectors and less dominance from the mega-cap tech names. The main rationale for this view is the attractive opportunities that have been overlooked and passed over as investors continue to pile in and chase the mega-caps higher. Looking back at recent history, 2022 was a rough year for markets across the board and many sectors lagged substantially in 2023. In our view, stagnation across most of the broad market has opened a lot of great buying opportunities outside of the technology sector. As we wrap up the first quarter, our outlook is playing out fairly well. The Magnificent Seven has narrowed down to the Terrific Two and the market is being led by a more diverse group, including energy, financials, industrials, and healthcare.

Jonathan Dane, Defiant Capital Group

The Magnificent Seven stocks dominated the news and drove the entire stock market higher in 2023. Looking ahead we think the pace of outperformance of these stocks is unlikely to persist, but still expect the stocks to continue to perform well. Given the broad reach and importance of these companies in the economy, as well as within most corporate infrastructure, it is difficult to envision a meaningful decline in earnings, even if economic growth slows. 

These stocks, despite opinions on valuations and earnings projections, are essential global companies. From data centers, to gaming, to consumer electronics, to corporate enterprise software, each component of the Magnificent Seven sells a vital product that companies of all sizes rely on (except maybe Tesla) to operate. As such, we expect most retail investors will continue to hold them as anchors in their portfolios, providing a core level of stock price support.

Brian Tarquinio, The WTL Group, Morgan Stanley

It’s been a fantastic run for sure and demonstrates why investing is two parts art, one part science.  A “quant” can give you a million reasons why US Large Cap Growth, which is dominated by the “Mag 7,” is wildly overvalued.  Follow the science as they say!  But, then reality gets in the way.  This is not meant to disparage securities analysis, without which nothing can be connected to anything.  It is just to observe that markets are composed of individuals – billions of them – all acting on their best guess of what the future may hold.  Markets are perhaps the first example of the “network effect,” long before it became a fashionable meme at the inception of the internet age at Stanford. 

Within the rarified air of the U.S market valuations, the Mag 7 occupy commanding heights.  While we believe they are excellent companies and deserve the acclaim they have garnered, we suspect their rich valuations make it unlikely they can continue to lead much longer.  We look to international developed and emerging markets, small caps, and value to lead from here.

James Armstrong, Henry Armstrong Associates 

It’s important to recognize that the so-called Magnificent Seven differ greatly from each other in very important ways. For example, Tesla faces an avalanche of new, deadly competition, has slowed down, and is struggling to maintain its position. Its stock price has lost half its value in the last two years. Microsoft, by contrast, is the dominant leader in many of its businesses, and appears to have a head start in AI. Microsoft stock is up substantially, and now has a market cap of $3 trillion – six times that of Tesla. The other five companies, like any, have unique factors that will determine their futures. There is no rational reason to assume that all seven companies will perform in parallel, nor that all seven will lead the stock market, one way or another, going forward.

Greg Curtis, Greycourt

Will the Magnificent Seven tech stocks continue to lead the market going forward?

Yes. These are the healthiest and most productive companies in the economy and while their prices are high, they are not stratospheric. There will always be brief pullbacks when other stocks lead the way, but over the long term the Mag 7 and their successors will continue to lead the market for the simple reason that, long term, markets are rational. It makes no sense to favor slower-growing, less profitable, less dynamic companies except on rare occasions when the Mag 7 have become wildly overpriced or other stocks have become wildly underpriced. 

Tim Rice, Smithfield Trust 

As to whether the “Magnificent Seven” will propel markets higher in 2024, the answer is both “yes and no.”  While the most impactful stocks likely will not be comprised of these same seven companies, historically there have been, and will continue to be, a concentrated basket of stocks driving performance…from the “Nifty Fifty” to “FAANG” to the “Magnificent Seven” and beyond. 

Doug Stirling, Stirling Wealth Management at Janney Montgomery Scott

The magnificent seven play into many long-term secular themes, led by advances in artificial intelligence, and we view them as core portfolio holdings. The outperformance of these stocks has primarily come from earnings growth that has been much better than the rest of the market. Earnings are also projected to be much better than the overall market in 2024. At some point, their earnings will decelerate relative to the rest of the market and, consequently, so will their market leadership. However, timing changes in market leadership is very difficult and we would continue to own these stocks as part of a well-diversified portfolio.