Is the ride of tech’s ‘magnificent seven’ over?
The ride of the ‘Magnificent Seven’ group of high-profile technology companies may be nearing an end, if trends from the US stock market are to be believed.
Shares of Nvidia, Meta, Amazon, Microsoft, Alphabet, Apple and Tesla rose 112% on average in 2023. The performance of the seven companies was the main driver for the S&P 500 as investors navigated a period of high interest rates and fears of a recession, while putting money into companies that seemed poised to benefit the most from opportunities tied to artificial intelligence.
While the AI narrative remains in place this year, there is considerably more divergence among the seven stocks. Only Nvidia and Meta continue to post huge gains, while Apple is down and Tesla is the biggest decliner on the S&P 500 so far this year.
The average increase for the ‘seven’ 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. Only four of the stocks have outperformed the index so far this year.
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, analysts say.
“Last year, you could have been any investor and gotten the fundamentals completely wrong and made a bunch of money” by simply betting on any of the seven hot stocks, said Dan Niles, founder and portfolio manager at Satori Fund. “This year, if you look at the stocks, it’s really come down to the companies that have had numbers go up after they’ve reported.”
Take a closer look
With some of the stocks performing less magnificently in 2024, advisors and experts are suggesting taking a closer look at what is being bought rather than blindly trusting the seven to keep sustaining markets higher.
The diverging outlooks for the seven have become evident since they reported quarterly earnings, Michael O’Rourke, chief market strategist at Jones Trading, said in an interview earlier this month. Nvidia, Meta, Amazon, Alphabet and Microsoft all had strong reports, while Apple and Tesla came in short of market expectations.
The fundamental performance of each company was “drastically different,” making it hard to classify them as one group, O’Rourke said.
One example of how the market previously ignored fundamentals is Apple, Niles said. The iPhone maker cut estimates each quarter last year, and still shares neared 50% growth for the year. That’s been course-corrected this year as Apple fell 11% in the first quarter.
Tesla, which saw its stock price double last year, has faced a particularly difficult stretch as consumer demand has waned, forcing the maker of electric vehicles to cut prices in the US and elsewhere to stimulate sales, which has cut into profit margins. Meanwhile, competition in the EV market is intensifying, particularly in China.
“The EV space has been under pressure for more than a year now,” O’Rourke said. “That’s manifesting itself in Tesla’s business and the share price now.”
Fantatic Four or Super Six?
Niles now calls the group of winners the Fantastic Four, while LPL Financial called the companies ex-Tesla the Super Six.
While some question whether the grouping still makes sense, the Roundhill Magnificent Seven exchange traded fund (ETF) has seen rising inflows and rose 17% in the first quarter.
The ETF, which has $175 million in assets under management, offers exposure to all seven stocks, regardless of how well they are performing, Dave Mazza, chief strategy officer at Roundhill Investments, said in an interview.
“For the time being, the marketplace is still coalescing around the thesis of those seven names, which is why they’re all in the portfolio,” Mazza said.
“Until there’s a definitive replacement for any name for any reason, we would still have exposure to the seven that are presently bucketed in that group,” Mazza said. “If the market were to decide a new security was magnificent, and one of the companies didn’t no longer belonged, then we would consider reevaluating.”
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