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Fortune
Fortune
Greg McKenna

The 'Magnificent Seven' have dragged the S&P to record highs. Will the moniker remain relevant?

(Credit: Angela Weiss—AFP/Getty Images)

Bank of America analyst Michael Hartnett popularized the “Magnificent Seven” as a stock term just over a year ago. The movie-inspired moniker refers to AlphabetAmazonApple, Meta, Microsoft, Nvidia, and Tesla, which accounted for half of the S&P 500’s total gains last year, according to a report from Morgan Stanley. Like the acronym FAANG before it, the "Magnificent Seven" has served as a strategy for some investors—raising the question of how much longer this particular basket of stocks will have an outsize influence.

Whether the term—a reference to an acclaimed 1960 western that Hartnett used in a May 2023 note to investors—has outgrown its relevance is up for debate. What’s not is that shareholders have been rewarded with a combined annualized return of over 46% in the last five years, compared to just over 13% for the S&P.

Angelo Zino of CFRA Research said he expects the earnings trajectory of these seven names to continue to outperform the market over the next decade.

“They're what we view as growth at a reasonable price,” Zino said.

Those high-quality earnings, Zino said, have been especially attractive in a high-interest rate environment, even before the artificial intelligence boom captivated markets.

The struggles of some members of the Magnificent Seven (particularly Tesla) early in 2024, fears of overconcentration risk, and the emergence of other players in the AI race, however, have analysts like Baird’s Ted Mortonson questioning whether the phrase should remain in fashion.

“Talking about just the Magnificent Seven, you're missing a large swath of other names that could compound returns pretty aggressively in the next two to three years,” he said.

Magnificent Seven present both AI opportunity and defensive play

The importance of large-cap stocks to the market is not a new phenomenon. A January report from Vanguard found that out of thousands of stocks, only 72 had accounted for half of the market’s total returns since 1926. The trend held even when excluding the explosion of mega-cap tech growth that has inspired several acronyms over the last decade.

CNBC’s Jim Cramer popularized the term FANG (for Facebook parent Meta, Amazon, Netflix, and Google parent Alphabet) in 2013. Eventually, a second A was included to include Apple.

That term would eventually give way to the Magnificent Seven, a gorup of companies who boast a combined market capitalization of over $16 trillion and loom large in not just the markets but daily life. All seven companies, Zino said, have massive ecosystems that will presumably become only easier to monetize in the age of AI.

“These are names that each one of us use to some capacity every single day of our lives,” he said.

This visibility helps makes these stocks a relative safety net for investors, Zino said. In a market plagued by election fears and geopolitical risks, Mortonson explained, institutional investors demand names sporting massive free cash flows.

“They're almost becoming somewhat defensive plays in a down market just because they are so profitable and dominant,” Mortonson said.

Tech behemoths maintain long-term relevance

The struggles of Tesla, Apple, and Alphabet early in 2024 led some analysts to start dubbing the other four big tech stocks the “Fab Four,” though shares of Apple and Alphabet recovered to outpace the S&P, while a recent Tesla rally virtually erased its year-to-date losses. Bank of America analysts expect growth to broaden out as second-quarter earnings get underway.

In the near term, Zino believes the sharp outperformance of the Magnificent Seven could cool down as some fund managers reallocate their positions to more value-oriented areas that have underperformed. That doesn’t mean he thinks these companies are going anywhere, particularly in the age of AI.

“We're hard pressed to think that these [Magnificent Seven] names aren't going to be among the biggest winners out there,” he said.

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