Magnificent 7 companies aren’t just foes, they’re also friends

You’re undoubtedly aware that seven stocks account for an outsized portion of the S&P 500 and its recent gains. But you may not realize how dependent they are on each other.

The Magnificent 7, as they’re known, include Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Meta Platforms (NASDAQ: META), Microsoft (NASDAQ: MSFT), Nvidia (NASDAQ: NVDA) and Tesla (NASDAQ: TSLA). They account for more than 30% of the S&P 500’s market capitalization, and they were responsible for more than half of the index’s gain last year.

A decline by all seven would obviously take a toll on the overall market. And it may take a drop by just one of them to get the ball rolling. While you might think of them as competitors with each other, they’re also closely intertwined.  

Nvidia, the granddaddy of them all with a market cap of $3 trillion, garners almost 50% of its revenue from other Mag 7 members, Harvard Business and Law professor Mihir Desai estimated in The New York Times.

Meanwhile, Alphabet’s Google paid Apple $20 billion in 2022 to be the default search engine on its Safari browser. That amounts to about 20% of Apple’s profit in that fiscal year. Another connection: Meta uses Amazon Web Services for its cloud services and artificial intelligence operations.

Global issue, US history

Companies’ interconnections are powerful around the world. In many countries, such as Korea and Japan, big companies own stakes of each other. In the US we learned about the inter-connectedness of financial companies in 2008.

When Lehman Brothers went under that year, financial institutions that were counterparties in financial transactions nearly bit the dust too. That included virtually all the major commercial and investment banks and some insurance companies too. They required massive government bailouts to avoid collapse. Of course, their stocks tumbled and took the other market sectors down too.

In 2000, the year of the technology stock crash, many of the tech companies that had led the market higher had close ties. For example, many tech companies utilized the services of Cisco (NASDAQ: CSCO), Microsoft and Oracle (NYSE: ORCL). So the tech companies dragged each other down. And that ended in declines for the S&P 500 for three straight years.

The same danger is present now. It could be a case of “together we rise, together we fall.”