The Magnificent Seven stocks have gotten a lot of buzz as of late. And for good reason.
The term was coined by Bank of America analyst Michael Hartnett and is used to describe seven massive tech-focused companies -- Apple (AAPL -0.35%), Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), Meta Platforms (NASDAQ: META), Nvidia (NASDAQ: NVDA), and Tesla (NASDAQ: TSLA). All seven companies are industry leaders and influential in their own right. But 2023 changed just how important this group is.
Last year, the Magnificent Seven gained between 48.2% on the low end (Apple) and a blistering 238.9% on the high end (Nvidia). Even more astonishing is the sheer value creation.
Entering 2023, the total value of the Magnificent Seven was $6.92 trillion. Entering 2024, the value ballooned to... wait for it... $12.04 trillion! Over $5 trillion in value was created in a single calendar year.
Fast forward to today, and the Magnificent Seven make up 28.4% of the S&P 500. For context, the entire tech sector makes up 29.2% of the S&P 500 (Amazon, Tesla, Alphabet, and Meta Platforms are not in the tech sector). If you're buying an S&P 500 index fund -- as so many people do -- a significant part of your investment is really in the Magnificent Seven.
Some investors may be feeling like these companies are overvalued -- or at the very least, they're looking for other opportunities. Yet the reality is that the American economy is heavily dependent on these companies. And they are a key reason why the U.S. economy has done so well, relative to international markets.
Here's a simple mental trick to help cope with investing in the Magnificent Seven.
Image source: Getty Images.
The new normal
One of the biggest mistakes investors make is underestimating the mental side of investing. When equity prices are falling, the fight-or-flight response kicks in.
People want to take action by trading their way out of the sell-off (fighting) or selling everything and walking away (flying). But both those responses have proven detrimental in every bear market. The best course of action is to suppress instinct and do nothing.
In a bull market, following the herd and buying stocks to ride the wave can be tempting. But again, it's better to have a balanced approach of focusing on companies you understand and believe in long term, and not buying a hot stock just because you think it will go up.
I've been following the stock market for a long time. And the reason behind writing this article is because the S&P 500 feels, frankly, uncomfortable. Maybe more than ever before.
Having just a handful of companies make up so much of the market's value changes the composition of the S&P 500. It's even more lopsided in the Nasdaq 100, where just shy of 40% of the value is in the Magnificent Seven. The market feels more abstract than ever before because so much of the value is in companies that don't make products that people see or have businesses solely tied to the digital world. There has never been a time in the S&P 500 where so much of the market cap was concentrated in tech-related companies.
Just a decade ago, the top 10 most valuable companies by market cap were, in order, Apple, ExxonMobil, Alphabet, Microsoft, Berkshire Hathaway, Johnson & Johnson, Walmart, Chevron, Wells Fargo, and Procter & Gamble. Five years ago, no single company was worth over $1 trillion. Today, five of the Magnificent Seven stocks have market capitalizations above $1 trillion, while Meta Platforms is within striking distance and Tesla has had a market cap of over $1 trillion before.
The portfolio tax
Picking individual stocks or making contrarian investment decisions can be fun and freeing. But it's a step too far to completely disagree with the market's trajectory or not want to invest in the stock market just because you don't like the companies that are driving the market higher.
I'm not in love with the Magnificent Seven domination, but I also think it's a mistake to fight it. In fact, I would be interested in buying a few Magnificent Seven stocks in 2024. So I'm not plugging my nose on the whole lot.
But the idea of simply carving out a portion of the investment and accepting it as something out of my control helps make the decision easier. After all, the amount invested in those stocks is sizable. A $3,525 investment in an S&P 500 index fund is essentially $1,000 in the Magnificent Seven and $2,525 in the rest of the market.
The biggest takeaway, or the reality that I've come to terms with, is that if you're going to be investing in the U.S. stock market, you have to accept the importance of these companies and the influence they will have. After all, if the Magnificent Seven stocks are selling off, chances are most of the market is going down, too.
The value of the U.S. stock market is dependent on big tech. Plain and simple. Running from this reality just because it is uncomfortable is the wrong move.
By considering the Magnificent Seven as a portfolio tax, I set myself up to be less frustrated if it sells off. For example, if the Magnificent Seven plummets 50% so that the S&P 500 falls 14% on the Magnificent Seven alone, I can be less upset because I've already viewed that part of the investment as something out of my control. By the same token, if the Magnificent Seven continues to outperform the S&P 500 and get bigger and bigger, I'll feel good that I didn't fight the current.
Find what works for you
The best way to invest is to leave room for creativity while being patient and trusting that the S&P 500 isn't perfect but is generally right. Being too contrarian and swimming upstream against the market can backfire and yield poor returns. Unless you're an extremely risk-averse investor focused on passive income and supplementing income in retirement, it's a good idea to have at least some exposure to big tech, even if it's just through an index or exchange-traded fund.
If you're like me and think the Magnificent Seven are generally overvalued, maybe the idea of giving up control of index fund investing will also work for you. I admit it might sound a bit silly, but the psychological side of investing is anything but that. When volatility spikes in the stock market, controlling your emotions can be the difference between staying on track and making a catastrophic financial decision. Like it or not, ignoring the Magnificent Seven would have been a big mistake in 2023 -- and might continue to be in 2024 and beyond.
