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Time To Ditch The “Magnificent Seven”? Navigating Potential Challenges For Tech Giants

Last Updated January 21, 2024 11:12 AM
Giuseppe Ciccomascolo
Last Updated January 21, 2024 11:12 AM

   Key Takeaways

  • The Magnificent Seven are a group of tech companies who have driven the S&P 500’s recent rally.
  • They have all heavily invested in AI, aiming to benefit from the continued growth of this technology.
  • However, the valuations of these companies are very high.
  • There is a risk that they could experience a pullback in the near term.
  • Are they still a good call for investors?

In 2023, the S&P 500’s 24% gain was primarily driven by a select group of seven companies, known as the ‘Magnificent Seven.’ Amazon, Apple, Tesla, Alphabet, Microsoft, Nvidia, and Meta individually witnessed impressive increases, ranging from 50% (Apple) to 240% (Nvidia), solidifying their positions as some of the market’s most lucrative investments.

However, these substantial gains come with a caveat: higher valuations. As of January 19 2024, these seven stocks carry an average forward price-to-earnings ratio of 44 times, more than double the S&P 500 ‘s average. This places them among the priciest stocks in the market.

Will AI Momentum Continue?

The recent surge in returns from the Magnificent Seven is due to the flourishing field of artificial intelligence (AI), notably propelled by the ascendancy of large language models (LLMs) such as OpenAI’s ChatGPT. ChatGPT has drawn significant investment from Microsoft itself. It gained prominence for its versatile applications in writing, coding, image generation, and integration across Microsoft’s products.

All members of the Magnificent Seven, except Nvidia, are actively engaged in the development and deployment of AI models. Nvidia is specializing in the sale of computer chips that power these models.

This technological landscape could reshape global dynamics, but the critical question remains: is this transformation overhyped?

Ben Rogoff, manager of Polar Capital Technology Ord  investment trust, expresses heightened enthusiasm for AI’s potential. One year after the public launch of ChatGPT, Rogoff believes the world stands at a pivotal moment in technology evolution, asserting that generative AI is as crucial, if not more so, than the internet and the smartphone.

Rogoff foresees a swift AI adoption ‘diffusion rate,’ surpassing previous transformative technologies and granting almost instant access to billions of global users. If his prediction holds true, ushering in a new technological era, the AI investment theme will flourish, with the Magnificent Seven spearheading this paradigm shift.

Being Expensive May Keep Investors Away

While advancements in AI by this elite group of companies may contribute to increased profits and revenue, there’s a looming risk that current investors might be overvaluing their shares.

Ben Rogoff told Finimize  that, given the robust performance in 2023, a near-term pullback in the stock prices of these seven companies wouldn’t be surprising. Especially with the overall positive shift in investor sentiment. He is vigilant for signs of traders capitalizing on profits from AI-related companies and the Magnificent Seven.

The year 2024 began with a tech-heavy Nasdaq 100 index dropping 2% in the first trading week, rebounding thereafter. Despite the recent exceptional gains in the Magnificent Seven, Rogoff notes that they partly stem from a relatively depressed starting point, considering their 2022 slump of about 40%.

Taking a long-term view, Rogoff anticipates a “broadening out” of winners from the AI megatrend rather than a repetition of the recent stellar performance by these tech superstars.

Bank of America analysts align  with this view, expecting more returns from companies outside the Magnificent Seven. They caution against overexcitement about Big Tech, as seen in the outperformance of the equal-weighted S&P 500 compared to the market cap-weighted index since mid-November.

Ditching Or Choosing The Magnificent Seven?

Concerned investors eyeing alternatives to the Magnificent Seven’s potential downturn may explore funds focusing on small and mid-sized companies. Notable choices in the Super 60 funds include Artemis US Smaller Companies, abrdn Global Smaller Companies, and Henderson Smaller Companies.

For those desiring value-oriented investments outside the Magnificent Seven, a compelling option is the ACE 40-rated Schroder Global Sustainable Equity. Another may be the Super 60-rated Artemis SmartGARP Global Equity.

Equal-weight funds, designed to maintain an equal investment in each company within a portfolio, provide another avenue. Examples include the iShares S&P 500 Equal Weight ETF and the Invesco S&P 500 Equal Weight ETF. A recent Interactive Investor article  elaborated on the primary benefits of an equal-weight index.

Investors who remain optimistic about the Magnificent Seven’s continued stellar performance can explore Nasdaq 100 tracker funds, such as the Invesco EQQQ NASDAQ-100 ETF or the iShares NASDAQ 100 ETF. These popular exchange-traded funds include all seven shares among their top ten holdings.

Don’t Write Them Off

Yes, the Magnificent Seven are not for all wallets and their stock prices are decreasing, too. But don’t write them off, said deVere Group’s CEO Nigel Green .

He said: “The recent slip in these tech stocks is prompting investors and analysts to question the sustainability of their impressive 2023 rally.

“But while uncertainties remain, and there are compelling reasons to believe that these stocks may not surpass the highs of last year, we expect them to continue to perform well, captivating global investors’ attention in 2024.”

The deVere CEO cites five reasons for the continued success of the Magnificent Seven in 2024. Firstly, he attributes the recent pullback to post-rally realism, aligning valuations with fundamentals and promoting sustainable growth. Secondly, the maturation of market positions for giants like Apple, Microsoft, Amazon, and Alphabet suggests steady performance. Thirdly, ongoing innovation and evolution, seen in ventures like Meta’s metaverse and Tesla’s advancements, maintain appeal for investors seeking cutting-edge technologies.

Fourth, these firms exhibit resilience during economic downturns, boasting diversified revenue streams and robust balance sheets. Lastly, the global shift towards digitalization and tech megatrends propels the Magnificent Seven’s success. It positions them as leaders in transformative industry shifts.

Despite a potentially less meteoric performance in 2024, their maturing market positions, innovation commitment, economic resilience, and alignment with global trends ensure sustained success, solidifying their status as formidable players for investors worldwide.

Disclaimer

Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.

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