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Seven stocks, known as the Magnificent Seven, drove the markets up in the front half of 2023; 493 other stocks were flat. Who are the Magnificent Seven?
Markets are surging. The S&P 500 is up approximately 15% year-to-date, and the Nasdaq is up approximately 30%, as of early July 2023. All this is happening while forecasters warn about a 2023 recession, rising interest rates and persistent inflation. Why are these stock indices doing well? The tech turnaround, and specifically the huge gains of the world’s largest companies, which account for more than 50% of the markets’ returns. And many analysts, even in Canada, point to the Magnificent Seven.
Not to be confused with the western movie of the same name, the Magnificent Seven include Apple, Alphabet (formerly Google), Amazon, Meta (formerly Facebook), Microsoft, Nvidia and Tesla (an automaker widely acknowledged as more tech stock than car company).
Thankfully, and easier to remember, the Magnificent Seven are making waves. For the first six months of 2023, this group of stocks powered the S&P 500 and Nasdaq indices to significantly higher returns, wiping out much of the losses of 2022. These same stocks were among the hardest hit last year. But now, thanks to the advances made in generative artificial intelligence (AI), such as ChatGPT, which is poised to change how we live and work, the world is back to a “tech is the future” mindset, and prices and markets are catching up.
The way things are going, the markets could hit their best performances in the not-too-distant future. Is it healthy for the Magnificent Seven to have this outsized impact on the markets?
The short answer: of course not. There’s already talk of another tech bubble reminiscent of the early 2000s—but this is not that. Those dot-com companies (e.g., Pets.com, theGlobe.com, Bid.com) had surging valuations based on unrealized dreams. Apple, the most valuable company on the planet, recently reached a new market cap milestone: USD$3 trillion. (That’s about the same as the market capitalization of France.) These are solid businesses, with strong sales and huge new opportunities for growth, thanks to artificial intelligence.
Investors who are only focused on deep discounts could fall into a value trap and buy “cheap” stocks that may not be poised for growth.
Tech stocks—and particularly the Magnificent Seven—aren’t just about strong growth. They could also be defensive plays for a portfolio because these companies are well established, diversified and flush with cash. This certainly proved to be the case in 2020, when COVID-19 struck and blue-chip bank stocks crashed.
What does this mean for Canadian investors? While on the face of it so much power resting with such a small group can seem problematic, the size, value and growth potential of these companies allow them to serve as a stabilizer in a fast-changing global business environment.
The rise of technology stocks is not a trend for Canadian investors and those around the world—it’s status quo. The Magnificent Seven have led the markets for years. AI is now being talked about as the new industrial revolution. It will allow these companies to enhance and add products and services to their offerings.
Rather than being fearful of AI’s effects, complaining about high valuations and waiting for a crash, many investors are looking to own these stocks, or at least a few of them.
Even with high valuations, there are still bargains to be had, if you adopt a GARP (growth at a reasonable price) approach. It may be worth looking at historical values, current sales, future earnings and growth, as well. In other words, instead of focusing on price per earnings, also consider price per earnings per growth (PEG) ratio of a stock. Investors who are only focused on deep discounts could fall into a value trap and buy “cheap” stocks that may not be poised for growth.
It always makes sense to diversify and build a balanced portfolio. And it’s possible to do that while applying a GARP approach for bargains in all sectors. For example, lately I’m focused on bank stocks, which have yet to participate in this year’s rally. If you haven’t already introduced technology into your portfolio, it may be worth considering now.
Ideally, we’d want to see a broader base of growth with more stocks and sectors participating in said growth. But how often do you see all sectors moving higher together? Sometimes, maybe. For the most part, though, over the last several years, the indices have moved in the same direction in which the largest companies moved. And today, the largest companies are technology companies. The Magnificent Seven are the companies powering markets upward and the world forward right now.
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The suspense is killing me…who is the 7th!? You seem to have listed only the spectacular 6!