The Magnificent Seven – is it justified?

If you’ve been paying attention to the stock market and financial media, you have very likely heard of the Magnificent Seven (also known as the Mag7). Before going further, let’s itemize the companies that comprise the Mag7 stocks. They are: 1. Meta, 2. Nvidia, 3. Microsoft, 4. Amazon, 5. Apple, 6. Alphabet, and 7. Tesla. Most of the media attention has been paid to the returns of the Mag7. Here are the one-year returns of these seven companies:

Three major observations stand out: 1) Nvidia and Meta are the clear standouts, dominating all others, 2.) All but one (Tesla) have outperformed the S&P 500 index over the past year, and 3.) Tesla’s recent downfall, beginning in July of 2023, has been spectacularly bad. Whether Tesla’s fall is permanent or temporary has yet to be determined, but it seems likely that Tesla will be replaced in this list by another company if its stock price doesn’t recover soon. Or the list may simply be reduced to the Mag6. Technically, Tesla looks broken.

Is Tesla the proverbial “canary in the coal mine” signaling the beginning of the end for the Mag7? Or is there more staying power to the remaining stalwarts? We will learn much in 2024 with respect to the Mag7 and the rest of the market. Beyond Tesla, the beginning of 2024 has been like 2023 in that market returns are once again concentrated in the Mag6. We at WealthPlan Group are wondering, are the returns to the Mag7 justified, or is it hype? To help answer the question, some great charts from FactSet shed light on the subject. The two charts below are absolutely MIND BLOWING and help explain why market returns are so narrowly concentrated in these stocks.

The first chart shows the year-over-year fourth quarter 2023 earnings growth of the Mag7 minus Tesla versus the rest of the S&P 500 constituents combined. In the fourth quarter, these companies simply dominated the rest of the market. Without them, year-over-year growth would have been negative 10%!

Things don’t improve much in terms of market breadth (i.e., more participation in earnings growth by more companies) looking at expectations for the first quarter of 2024, depicted below. We will point out here that our friends at FactSet are only focusing on four of the Mag7 (Amazon, Google, Meta, and Nvidia). But these four stocks are expected by Wall Street analysts to grow their earnings a whopping 80% in the year-over-year first quarter forecast as compared to zero earnings growth for the rest of the S&P 500 index constituents. This is a narrow market and the rest of the market is not very healthy as measured by Wall Street earnings growth forecasts!

Given this narrow set-up (narrow in both returns and earnings growth expectations) what should we expect? Will the rest of the market join the earnings growth of the narrow leadership? Or does Tesla’s decline foretell a future in which the fundamentals of the other Mags also falter? Time will tell. But given the high valuations of these stocks, we think some caution is in order.  When they fall, they tend to fall hard.