Magnificent 7 risk losing their magnificence
The Magnificent 7 have come to play a bigger and bigger role in the stock market over the past 10 years.
It’s gotten to the point where the seven companies accounted for 53% of the S&P 500 index’ return last year, with Nvidia (NASDAQ: NVDA) alone responsible for 21%. The other six members, of course, are Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Meta Platforms (NASDAQ: META), Microsoft (NASDAQ: MSFT) and Tesla (NASDAQ: TSLA).
But the stocks face risks going forward. So there may be an expansion of names at the top, or a reshuffling, where other companies take the Mag 7’s place. It’s also possible that all stocks tumble, as the market corrects from two straight years of 20-plus percent gains.
There are plenty of reasons why the seven stocks rose. Demand is strong for their products. On the consumer side, purchases have exploded for everything from Amazon Prime to Apple watches. Business demand for the Mag 7’s products also has surged, ranging from cloud computing to artificial intelligence.
The Mag 7 have posted blow-out earnings over the past few years. For example, Meta reported profit of $15.7 billion for the third quarter, up 35% from a year earlier.
However, the mania over artificial intelligence has led to a lot more spending than profits for some of the Mag 7.
The $53 billion that Microsoft spent on capital expenditures, including AI, in the first three quarters of the year equals 28% of the company’s revenue. That’s way more than the 12% Microsoft averaged for 2014-23, according to The Wall Street Journal. And it’s no sure thing that AI spending will pay off anytime soon.
The Trump effect
US President-elect Donald Trump’s economic policy also could hurt the Mag. 7, especially if he follows through on his threat to increase tariffs. China accounts for more than half of Tesla’s deliveries, so it would likely suffer.
If a trade war with China ensues, that would come down particularly hard on Apple. It saw 16% of its sales go to Greater China during the third quarter, including Hong Kong and Taiwan.
Trump very much wants the stock market to rise while he’s in office. Tariffs and a trade war would hurt large-cap stocks more than small-cap, because most small-cap companies aren’t big enough to sell and/or produce overseas. So perhaps Trump would be happy to see small-cap stocks lead a market rally.
He also has expressed animus at one time or another toward Alphabet, Amazon and Meta. He could push for regulatory steps to be taken against them. The first Trump administration sued Alphabet on antitrust grounds, and he has threatened more action against the company in his second go-round.
Another risk for the Mag 7 is the economy. If it weakens, their earnings could suffer. Annualized economic growth registered 3.1% in the third quarter.
To be sure, you can easily construct a bullish case for the Mag 7, but the risks are there. It’s possible that a year from now they’ll be a lot less magnificent.
