The rapid rise of the Magnificent Seven stocks has raised apprehensions about their elevated valuation and the potential overconcentration they hold within the stock market today.
Dominating Market Cap and Share
Collectively, Amazon, Apple, Alphabet, Microsoft, Meta Platforms, Tesla, and Nvidia make up nearly $12 trillion in market capitalization. These seven companies represent 28% of the S&P 500 and almost 23% of the entire U.S. stock market.
To put this into perspective, Torsten Slok, chief economist at Apollo Global Management, emphasizes that the market cap of these seven stocks alone is four times greater than that of the entire Russell 2000 index. Additionally, data reveals that this group exceeds the size of any individual country’s stock market, excluding the United States.
Comparatively, the combined worth of all stocks trading on China’s Shanghai and Shenzhen exchanges is just over $8 trillion, approximately two-thirds the size of the Magnificent Seven.
Furthermore, these seven stocks collectively match the market capitalization of the entire stock markets of the United Kingdom, Canada, and Japan. Astonishingly, either Apple or Microsoft alone surpasses the entire stock market of Canada.
Achieving Success through Generative AI
Last year, the Magnificent Seven stocks emerged as some of the biggest winners in the market, driven by the growing investor enthusiasm surrounding generative AI.
Despite experiencing some initial dips in the new year, a few members of this group have already rallied back. Nvidia has seen a 5.4% year-to-date gain, Meta Platforms rose 1.4%, and Alphabet edged up by 0.1%. However, the remaining stocks in the group remain lower for the year.
The Changing Landscape of the S&P 500
The performance of the S&P 500 in 2023 was undoubtedly impressive, with a remarkable 24% increase. However, this growth was largely driven by a select group of seven companies. As we enter 2024, it seems that these Magnificent Seven may be taking a back seat, giving smaller stocks an opportunity to shine.
According to Charles Schwab strategist Kevin Gordon, nearly half of the index’s members have not yet recovered to their pre-2022 highs when the market reached a record peak. This highlights the uneven nature of the rally and suggests that the performance of larger companies is not as remarkable as their size might suggest.
Gordon points out that numerous other companies outperformed the Magnificent Seven last year, and he believes this trend could continue. He states, “There’s no reason to believe that can’t be repeated again this year.” This suggests that investors should broaden their focus beyond these seven dominant companies.
However, not everyone is quick to dismiss the tech giants. DeVere Group CEO Nigel Green argues that despite a rocky start to the year, the Magnificent Seven still hold significant value for investors worldwide. Green attributes their sustained success to their market maturity, commitment to innovation, resilience during economic downturns, and alignment with global megatrends. He states, “Only the foolish would dismiss the Magnificent Seven.”
As the landscape of the S&P 500 evolves, it remains to be seen who will emerge as the new frontrunners. While smaller stocks may have an opportunity to take the lead, the Magnificent Seven’s influence and potential should not be overlooked.
