First, there was FANG. Then came FAANG. Now we have the Magnificent 7. Each label represents a catchy way to categorize the monster outperformers of the stock market over the past decade.
Today, the seven market-leading stocks that make up the Magnificent 7 dominate the economy and, in many ways, will continue to dominate how you invest your money, even if their collective armor is starting to show some cracks.
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Understanding Magnificent 7 stocks
Facebook, Amazon, Netflix and Google. That was FANG. Concocted by financial media personality Jim Cramer and his colleague, Bob Lang, in 2013, the acronym changed to FAANG when Apple was added to the group in 2017.
But in 2015, Google officially became known as Alphabet. And, in 2021, Facebook started going by Meta Platforms to represent its entire ecosystem, including Instagram and WhatsApp. Then, two more huge tech stocks emerged as market outperformers: Microsoft and Nvidia.
FAANG was losing its bite as a way to describe the group.
As the group’s market dominance continued, Michael Hartnett, managing director and chief investment strategist at Bank of America Global Research, came up with the Magnificent 7, introducing the term in a 2023 research note. It caught on.
All the Magnificent 7 stocks, or Mag 7 for short, are either pure technology companies or — as is the case with automaker Tesla, streaming service Netflix and online retailer Amazon.com — tech-adjacent, meaning their corporate cultures tend to be like those of pure tech firms. They also use technology, much of it developed in-house, to deliver their products and services and power their ecosystems.
Inspired by the 1960 American Western, “The Magnificent Seven,” Hartnett told CNN Underscored Money that the “Film was always on TV at Christmas during childhood in the UK.” Then, after the 2023 failure of Silicon Valley Bank and “catalyzed by AI investor thirst for mega-cap, monopolistic tech giants that investors thought gave ‘all-weather’ upside in an ambiguous macro backdrop … we found seven, hence the name.”
These seven companies — Meta Platforms, Amazon, Apple, Netflix, Alphabet, Microsoft and Nvidia — all “have monopolistic/oligopolistic positions, pricing power, secular earnings power, balance sheets that can finance AI and so on,” Hartnett explained.
Performance analysis of Magnificent 7 stocks
To put the outperformance of the Magnificent 7 stocks in perspective, consider that the S&P 500 increased by 24.2% in 2023. As a group, the Magnificent 7 generated a 75.7% return.
Individually, here is how the Magnificent 7 stocks performed in 2023:
- Nvidia (NVDA): +239%
- Meta Platforms (META): +194%
- Tesla (TSLA): +102%
- Amazon (AMZN): +81%
- Alphabet (GOOG, GOOGL): +58%
- Microsoft (MSFT): +57%
- Apple (AAPL): +48%
To a stock, they all trounced the S&P 500 over the same period.
However, not all Magnificent 7 stocks have fared as well in 2024 — individually — as in 2023. In fact, as of the end of May, Tesla was down 28%, making it one of the S&P 500’s worst-performing stocks, and Apple was flat.
For the year through May 31, the returns for the S&P 500 and the Magnificent 7 looked like this:
- S&P 500: +10.6%
- Nvidia: +121.4%
- Meta Platforms: +31.9%
- Alphabet: +23.4%
- Amazon: +16.1%
- Microsoft: +10.4%
- Apple: -0.1%
- Tesla: -28.3%
Only time will tell how the rest of 2024 shakes out, but two things are clear: First, the broad stock market, as measured by the S&P 500, has remained resilient. Second, some members of the Magnificent 7 are underperforming the S&P 500. But, as we’ll detail below, these aren’t the only risks associated with investing in the Magnificent 7.
Nvidia stock split
Along with its May 2024 earnings report, Nvidia announced a 10-for-1 stock split to, in the company’s words, “make stock ownership more accessible to employees and investors.”
As of Monday, June 10, NVDA shareholders prior to the split will see nine additional shares of the company’s stock added to their account for every one share they own. The actual “paperwork” got done after Friday’s close and started showing up in portfolios over the weekend ahead of the Monday open.
As an illustrative example, if you owned one share of NVDA at $1,200 (approximate pre-split price), you will own 10 shares afterward at $120 per share. As such, the value of your NVDA position doesn’t change (save any movement up or down in the stock going forward post-split), just the number of shares you own and the price per share. So while the price-per-share might be more financially attractive and accessible to investors, this move changes nothing about the value of NVDA stock or the company.
Risks when investing in Magnificent 7 stocks
Overconcentration
Our performance analysis shows that one of the biggest considerations when investing is the risk of being over-concentrated in the Magnificent 7 stocks.
When the Magnificent 7 group does well, it does really well, propelling the S&P 500. When the Magnificent 7 doesn’t do so well, some of the highest fliers in the group take a relative beating.
Because the based on market capitalization, the largest companies comprise an outsized portion of the index. While the exact concentration changes frequently as the market caps of the member companies fluctuate, the Magnificent 7 composed 31.5% of the S&P 500 as of June 7.
Many investors will invest in the broad stock market via a low-cost index ETF, such as the SPDR S&P 500 ETF Trust, which tracks the S&P 500, or the Invesco QQQ ETF, which mirrors the composition and, subsequently, returns of the Nasdaq 100 index. As illustrated, the Magnificent 7 takes up an overweight segment of the S&P 500 (both the index itself and the ETFs that passively track it). This effect is even more pronounced in the tech-heavy Nasdaq 100, where the Magnificent 7 account for 42.3% of the index, as of June 6.
You’ll encounter a similar dynamic in many other index ETFs, especially ones that invest in the broad stock market or focus on the tech sector. While the current stumbles do not necessarily portend future downside, the past strong performance of the Magnificent 7 and, in turn, the S&P 500 isn’t a guarantee of future results.
AI and economic risks
Doug Cohen, managing director, portfolio management at Fiduciary Trust International identified the “key risk” of investing in the Magnificent 7 stocks as being overly reliant on mega-cap stocks sensitive to broad economic conditions and uncertainty around the future of artificial intelligence (AI).
“A sustained rise in interest rates due to, say, a rebound in inflation or increased concerns … [related] to surging US debt levels could weigh on most mega-cap growth stocks,” Cohen said. “As for AI, there are certainly some parallels with the 2000 internet boom/bust. If it turns out that practical AI applications don’t meet the initial hype or that regulation stymies growth, the momentum could certainly fade.”
To this end, Cohen sees increased competition in the spaces where the Magnificent 7 operate.
“That’s true in the case of AI broadly but also in the auto industry, within online advertising and semiconductors geared toward AI. There is also broad regulatory pushback on the antitrust front both in the US and Europe,” he said.
While Cohen sees “parallels” to the year 2000, he added: “Unlike the 2000 Internet bubble when concentration level within the S&P 500 was similar to the Magnificent Seven but the companies themselves were collectively only marginally profitable, the Magnificent Seven currently comprise about 22% of both trailing and next 12-month expected earnings. That’s not outrageous given their collective growth levels, strong balance sheets and growth opportunities. I think that 22% threshold is appropriate for investors who wish to avoid heavy exposure to a group of stocks that can often be highly correlated.”
As for Hartnett, who coined the Magnificent 7 name, he cautioned that the“Magnificent 7 have become magnificently priced.” As noted, the group currently comprises more than 31% of the overall S&P 500. In other words, just seven stocks accounted for nearly a third of the value of the entire index, Hartnett explained, noting that “such concentration of returns is always vulnerable to bad news, e.g. loss of pricing power (think Tesla), rising rates and so on.”
Frequently asked questions (FAQs)
Cohen’s answer to this question presents a conundrum. While he believes “Passive investors should be wary of relying exclusively on, say, the traditional market-cap weighted S&P 500 given the heavy Magnificent 7 concentration,” he thinks “something like the equal-weighted S&P 500, in isolation, probably provides too little exposure (by definition, those seven stocks would only comprise about 1.4% of your holdings).”
An equal-weight ETF simply owns the stocks of an underlying index in equal proportions, not based on market capitalization. The S&P 500 Equal Weight Index takes this approach to the S&P 500. Several ETFs, including the Invesco S&P 500 Equal Weight ETF, give investors equal-weight access to the S&P 500.
S&P Global created the S&P 500 Equal Weight Index in January 2003. In the 20 years since its inception, the index has outperformed the large-cap, mid-cap, small-cap, growth and value segments of the S&P 500 and the broader S&P 500.
Jim Thorne, chief market strategist at Wellington-Altus, said he’s “using the S&P 500 weights as my guideline. The appropriate level of exposure to the Magnificent 7 in the S&P 500 can vary based on individual risk tolerance, investment goals and overall portfolio diversification. As a general guideline, the recommendation is to limit exposure of any single stock to around 3% to 7% of a well-diversified portfolio to mitigate the risks associated with individual stock volatility and concentration risk.” As of June 7, the average weight of each Magnificent 7 stock, including both Google Class A and C shares, was about 3.9%.
