At times it can be a struggle to believe in the overall direction of the stock market, particularly as uncertainty remains with regards to interest rates and anticipating the Federal Reserve’s next policy decision. But when it comes to the "Magnificent Seven" stocks, so named by Bank of America analyst Michael Hartnett, there are plenty of the reasons to remain optimistic.
Hartnett earlier this year used the phrase "Magnificent Seven" to describe a basket of seven stocks: Alphabet (GOOG , GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA). These mega-cap tech giants, which are largely focused on secular growth trends such as artificial intelligence, cloud computing, and cutting edge hardware and software, have powered the broad market rally we have seen.
However, given that these seven mega-caps account for a massive sway over the S&P, an argument can be made as to whether the rally is as “broad” as it is believed to be. As of Friday’s close, the S&P 500 index is up nearly 15% year to date. However, without the cap weighting of the Magnificent Seven, the S&P 500 would be in negative territory for the year. This speaks to how heavily concentrated this trade currently is. Based on the holdings of active long-only funds through the end of September, 90% of funds hold Microsoft stock, for example.
Apple and Amazon were both held by more than 70% active long-only funds through the end of September. This was followed by Alphabet, Meta and Nvidia which are held by more than 60% of funds, while Tesla was held by 40% of funds. The least ownership reflects the most buying potential. In this case, Tesla would have the most upside from current levels. In fact, when looking at long-only funds relative to the S&P weighting, Apple and Tesla are the only ones among the Magnificent Seven with an underweight position.
As another sign of bullishness on the Magnificent Seven, the short interest on them is currently at an all-time low at slightly above 1% of market cap. Last week, CNBC’s Jim Cramer reminded investors of how hard it is to stick with Magnificent Seven. “You had to fight so many trends, so many obvious pain points, so many outspoken naysayers” Cramer said. “Remember, as obvious as these winners seem in retrospect, it was very easy to get shaken out.” Cramer explained the reason why these companies are “among the most heavily-traded in the business,” but he also pointed out believes they should be held instead.
While the heavy concentration is the stocks might be reason for concern, Cramer’s reasoning is correct. With their exposure to high-growth technologies, such as high-end software and hardware, cloud computing and artificial intelligence, the seven stocks have more than doubled the return of the S&P 500 over the past decade. Armed with tons of cash on their balance sheets, strong cash flows and excellent leadership, the Magnificent Seven are well-positioned to continue leading their respective markets over time.
For example, Nvidia’s prominent role in making chips that powers artificial intelligence is still in the early stages. Microsoft’s early dominance in AI and its ability to monetize its AI investments will continue to drive the stock higher. Tesla is in the same early stages of its self-driving platform, while Amazon, Google, Apple and Meta and developing high-margin services, and in some cases, cloud solutions that will benefit both consumers and the enterprise in the next decade.
In other words, even as the Magnificent Seven stocks are at a combined market capitalization of more than $10 trillion, there are still many reasons to expect them to continue to rise over time.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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