The Magnificent 7, defined as Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla, have had a “magnificent” run fueled by AI optimism over the past fourteen months. The Magnificent 7 has returned more than 106% in 2023, doubling the Nasdaq 100’s nearly 54% gain and significantly outperforming the S&P 500’s 24% gain. At first glance, it may appear that the Magnificent 7 is continuing its outperformance broader indices in 2024.
The Magnificent 7 has returned more than 106% in 2023, doubling the Nasdaq 100’s nearly 54% gain and … [+]
However, as dominoes in decline, these market generals peak and break away from the market as a whole. First Tesla in July 2023, then Apple and Google in February reached the peak, and now Microsoft is not reaching a new peak with the latest rise in major markets.
NASDAQ composite screens, located in a studio on Whitehall Street, display earnings and … [+]
The Magnificent 7 of 2023 have now become the Magnificent 3 of 2024: Nvidia, Meta and Amazon. Among these, Nvidia has had an exceptional start to the year, with its shares gaining nearly 60% year to date thanks to the GPU leader’s beat and recovery quarters.
The Magnificent 7 of 2023 have now become the Magnificent 3 of 2024: Nvidia, Meta and Amazon.
There are two reasons why this is important – which we also highlighted in our analysis »Five stocks (not seven) can lead to new highs» from October – that “a handful of these stocks [the Mag 7] can push the major markets higher,” but we will now need more than three to continue the recovery.
First, these 7 stocks hold significant weighting within the indices. It will be difficult to continue a sustained upward surge if these FAANGs do not participate, given their disproportionate weight.
- The Mag 7 includes more than 40% of the Nasdaq 100 and more 29% of the S&P 500.
- MSFT, GOOGL, AAPL and TSLA represent about 18% of the S&P 500 and about 25% of the NASDAQ-100.
- For reference, Apple and Microsoft combined hold a larger weighting in the S&P 500 than Berkshire Hathaway, JP Morgan, UnitedHealth Group, Visa, Exxon, Mastercard, Johnson & Johnson, Procter and Gamble, Home Depot, Costco, Merck, and Chevron reunited. . If these companies all stagnated, it would be a major red flag. Yet both Apple and Microsoft are at a standstill.
Second, when cycle leaders begin to underperform, it tends to mark the start of a trend change. The FAANGs have been the clear leaders of this bull run, and we are now seeing them start to decline relative to the indices. Most of the time, leaders uphill tend to be leaders downhill.
In the current bull cycle, Nvidia, Meta and Amazon are the last three generals to reach new highs in the markets.
Nvidia, Meta and Amazon are the three latest generals reaching new highs in the markets.
Together, the trio represents approximately 15.8% of the Nasdaq 100 and 10.8% of the S&P 500. Nvidia’s post-earnings rally, in which the chip giant added worth nearly $250 billion, helped the S&P 500 add more than $2 trillion in market capitalization, while boosting other AI and tech stocks in general. If the trio began to follow the path of the four fallen dominoes, setting a high and drifting lower, the market would risk giving up some of its new gains, similar to what we discussed in our analysis.Apple can’t save this tech rally » at the end of January. In this paper, we explained how the market’s bull and bear scenarios “call for a level of volatility in 2024 that will retrace, at least, the rally we have seen since November 2023.”
High concentration risk
To some extent, the narrow leadership of this market resulting from the Magnificent 7’s AI-driven gains has raised alarm bells for some investors as market concentration has exceeded levels seen in the dot-com bubble. To be clear, my company is a pioneer in building an AI portfolio, and a sell-off would be a buying opportunity. However, narrow leadership is a problem that should not be ignored, as shown in the table below:
The Magnificent 7 represent more than 29% of the S&P 500, more than the 21% concentration of … [+]
As mentioned earlier, the Magnificent 7 represent more than 29% of the S&P 500, more than the 21% concentration of the top 7 S&P 500 stocks seen in 2017. 1999 and 2000 – keep in mind that Tesla is no longer among the 10 largest stocks in the S&P 500, so the concentration of the top 7 today is over 30%. This also represents a dramatic increase from the 14% concentration seen a decade ago.
This means that while the Magnificent 7 as a whole continues to outperform – all seven have already gained more than 22% since the start of 2024 – they will continue to paper over the broader market turmoil brewing beneath the surface . For example, at the end of February, the Nasdaq 100 and S&P 500 were up nearly 9% and more than 7%, respectively, while the equal-weighted S&P 500 index gained just over 2%.
At the end of February, the Nasdaq 100 and the S&P 500 were up nearly 9% and more than 7%, respectively, while … [+]
This concentrated dominance has helped the S&P 500 reach new highs, more than 6% above its 2021 high, while the equal-weighted S&P index (orange) has yet to regain that 2021 high, lying approximately 100 points lower. The influence of the Magnificent 7 is clearly visible: the S&P 500 outperforms the equal-weighted index by 26 percentage points, returning 81% versus 55% over the past five years; this gap widened throughout 2023, from 8 percentage points in April to 14 percentage points in July and 20 percentage points in October.
This concentrated dominance has helped the S&P 500 reach new highs, more than 6% above its 2021 level. … [+]
Knox Ridley, portfolio manager of the I/O Fund, noted in our October analysis: 5 stocks (not 7) can lead to new highs that “a handful of these stocks [the Mag 7] can push the biggest markets higher, and even potentially hit another high on the NASDAQ-100. The setup was that the indexes “were expected to see a considerable rebound over the coming weeks – months, which we believe will be led by a handful of big tech names.” Now that we’ve reached new heights, we think we’ll need more than three Mag 7s to continue.
Relatively intact valuations
Although the recent rises of AI favorites including Super Micro and Nvidia are prompting some investors to attract parallel After Cisco’s rise in 2000, Magnificent 7 valuations are relatively intact.
Tesla struggles with profit growth as price cuts weigh on margins, while Apple’s growing pains lead to minimal profit growth; On the other hand, Amazon shows strong earnings leverage thanks to improving margins, Google trades at a nearly 30% discount to its 30x PE last year, and Nvidia is strangely less expensive now than it was when it reached its lowest level in October. 2022 in the low $100 range.
Magnificent 7 valuations are relatively intact.
Compare that to Cisco, given the parallels drawn, which traded at more than 150 times earnings at the height of the dot-com bubble – a multiple more than twice as high as today’s most expensive Mag 7 today.
We discussed on Fox Business News this week how it’s important to keep an eye on valuation when determining which stocks to buy on a downturn. The impact of AI is very visible on the top line with the explosive quarters of Nvidia, and on the bottom line with the explosive quarters of Nvidia and Meta. However, the impact of AI on valuations is overlooked because these valuations are low and create a new buying opportunity in the event of weakness in the market as a whole.
Conclusion
We will continue to monitor the performance of the Magnificent 3 over the coming weeks and determine whether Meta, Nvidia, and Amazon will continue to dominate or whether they will follow the trend of the other four to underperform against the broader indices.
When these cycle leaders begin to underperform, it usually marks the start of a trend change. The FAANGs have undoubtedly led this bull run since 2023. Now we look at what will lead the market next, and most importantly, When.
If you own AI stocks or are interested in owning AI stocks, consider joining us for our next General Markets Webinar. Every Thursday at 4:30 p.m. Eastern Time, the I/O Fund team hosts a webinar for premium members to discuss how to navigate the broader market, manage risk, as well as to reveal our various long-term game plans regarding stock entries and exits. We offer trade alerts as well as an automated hedging signal. The I/O Fund is one of the only audited portfolios available to individual investors. Learn more here.
I/O Fund Portfolio Manager Knox Ridley and I/O Fund Equity Analyst Damien Robbins contributed to this report.