Advisors weigh in on the future of the Magnificent Seven

Have reports of the death of the Magnificent 7 been grossly exaggerated?

There has been a lot of analyst and pundit chatter of late about the so-called Magnificent 7 big-cap techs stocks being reduced to the “Super 6,” “Phenomenal 5,” “Fabulous 4” and even the “Terrific 3.”

Nothing lasts forever, of course, so it’s easy to understand why Wall Street’s trendsetters are telling their clients to sell off some of those names. You don’t go broke taking a profit, as they say. Especially a massive one.

Furthermore, there was never any real reason to believe that all these stocks should move in tandem - other than AI hype, that is - in the first place. They are all responsive to their own earnings and end-markets, most of which are fairly unique, ranging from cars (Tesla) to retail (Amazon) to chips (Nvidia).  So why lump them together at all?

Nevertheless, lumped they were and lumped they remain. And now advisors are choosing whether to stick with the entire septet, own them a la carte or purge the lot and wait for the market’s next group sensation to hit.

A MAGNIFICENT 2024 – SO FAR

Since the start of 2024, Alphabet stock is up 21 percent, Amazon, 20 percent, Meta, 25 percent, Microsoft, 8 percent and Nvidia, 80 percent. All on top of last year's magnificent gains. Only Apple and Tesla have stumbled so far this year, falling 6 percent and 22 percent.

Nevertheless, Tesla has screamed higher in the past week, regaining its mojo with a 36 percent jump after reports of a China self-driving deal. And Apple caught a sizable bid of more than 3 percent on Monday after Bernstein upgraded its shares ahead of its Thursday quarterly earnings release, saying the stock had fallen too far on fears of sluggish iPhone 15 sales and overall weak revenue in China.

So if those prodigal two stocks are finally rejoining the rest of the group, what does that mean for the group as a whole going forward?

“From a stock performance perspective, I have no thoughts on which one will be the best, but I do think any declaration of the demise has been premature,” said Jonathan Swanburg, president of TSA Wealth Management. “Most of these companies continue to have tremendous earnings and operate in a tech sector that continues to grow. 

As of right now, they collectively represent a weighting of more than 27% of the S&P 500 so whatever they do, they will have an outsized impact on the returns of the broader market, adds Swanburg.

Sean Beznicki, director of investments at VLP Financial Advisors, agrees that the “demise of the magnificent 7 does appear to be unwarranted despite the pullback we've seen this year.”  In his view, the exuberance for AI inflated the Mag 7 companies in 2023, and now investors are exercising more caution in rewarding these same companies.

“Heightened volatility is likely to be expected going forward as tech-enabled enterprises continue to position for long-term success as the dominant force in AI,” said Beznicki.

Scott Bishop, managing director at Presidio Wealth Partners, believes there is a high probability they continue their collective out-performance over the next 12 months that they saw the last 12 months.

“I do believe that some may be over-valued short term, but as a long-term investor, they are good to have in your portfolio,” said Bishop.

Meanwhile, Tom Graff, chief investment officer at Facet, admits it’s near impossible to know what is going to happen to that set of seven stocks specifically. But he does believe the boom in capex spending, especially on AI and automation, is not showing evidence of a slowdown.

“Many of the Magnificent 7 benefit directly from this increased investment spending. If that trend continues, then that's a big tailwind for several of these companies,” said Graff.

Chris Shuba, CEO of Helios, says he would “never count the Magnificent 7 out.” 

“Although technology-heavy, they represent a wide cross section of American innovation,” said Shuba. “To say that the Mag 7 are out is almost the equivalent of saying the US Economy is out, and I just don't think we're close to that yet.”

Still, he does admit that the Magnificent 7 stocks are behaving more in-line with their sectors and peer groups. And he sees the odds of the Mag 7 dominating the market this year as being substantially lower than previous years unless the Fed moves to drop rates more aggressively than expected.

PICKING A MAGNIFICENT WINNER

Christopher Davis, partner at Hudson Value Partners, currently has exposure to most of the Magnificent 7, but Alphabet stands out as his favorite going forward.

“With a reasonable valuation relative to its growth rate and dominant positions in search, advertising, and video it has the competitive dynamics we look for,” said Davis. “We also look at Alphabet through our ‘special situations’ lens, as we believe that the different businesses - especially YouTube - are worth more independently, creating a sum of the parts of discount.”

Davis says investors lacked patience in January's earnings results on Google Cloud and AI, yet were amply rewarded on last week's earnings call as management noted that Google Cloud is a top choice for Gen AI firms and start-ups. He adds that the company’s modest dividend shows this is a “mature shareholder friendly company, committed to compounding, not unprofitable growth for its own sake.”

Briann Glenn, chief investment officer at Premier Path Wealth Partners, would draft Meta as his MMP (Most Magnificent Player).

“It has a massive capital investment program that could generate big results. It’s buying back shares. The company has more than 3 billion engaged users, which is a cash flow machine for its advertising business today, but is a tremendously valuable audience to launch future products too,” said Glenn.

He says Apple used its installed base to successfully launch Watch and Airpods and the optionality for Meta’s global audience, about 40% of the planet, is wildly underappreciated.

“Never before in history has a company had daily access to 3 billion people,” said Glenn.