Many investors are familiar with the “Magnificent Seven” stocks, but did you know the name might carry a cautionary tone? These warnings from Bank of America executive Michael Hartnett are becoming increasingly relevant.
A Cautious Eye on the Magnificent Seven Stocks
Understanding the Magnificent Seven
This collection of tech giants has significantly influenced the S&P 500 (SNPINDEX: ^GSPC) index over the past two years.
After Hartnett introduced the Magnificent Seven moniker in May 2023, I created a simple acronym to remember them: “MAMA ANT.” Although it didn’t catch on, it helps me recall each of the seven companies. The group includes four software leaders:
Then it features three hardware innovators:
It’s clear that these six artificial intelligence (AI) experts, along with a key player in electric vehicles, are shaping the market landscape.
Fast forward to November 2024, and these companies remain at the forefront. They were part of the 10 largest American stocks by market capitalization in the spring of 2023 but have now claimed the top seven spots. Only two—Microsoft and Apple—have lagged behind the S&P 500 since last May, while the rest have thrived, lifting the index along with them.
The Risks Behind the Success
Looking back to May 2023, Hartnett identified several potential risks concerning the Magnificent Seven stocks.
- He predicted that the federal funds interest rate would rise above 4% (it was only 0.8% at the time) as inflation-fighting measures intensified. In reality, it soared to 5.3% just three months later.
- This tech group driven nearly all early 2023 market gains. While nearly half of the S&P 500 constituents lost ground that spring, Nvidia and Meta Platforms doubled their values.
- These companies were already large when the AI surge began, leading to disproportionate impacts on indexes weighted by market cap—like the S&P 500 and Nasdaq Composite. The Magnificent Seven now constitutes 32.2% of the S&P 500, up from 27.3% in May 2023 and 20.1% at the end of 2022. Hartnett voiced concerns over this concentration of influence.
- Hartnett also warned of a “baby bubble” around AI in 2023. Whether AI is a true innovation or a fleeting bubble remains uncertain, but it is definitely beyond the “baby” stage by now.
Michael Hartnett’s early identification of this stock group and its catchy title draws a parallel to a classic Western movie that ended sadly. He could have labeled it with more optimistic terms, but instead, he chose a title that resonates caution rather than celebration. The original movie, featuring Yul Brynner and Steve McQueen, had only three survivors among the seven gunfighters in the end. This metaphor indicates that, while AI stocks saw tremendous gains, history has shown that markets can shift unexpectedly.
Currently, the average S&P 500 stock is valued at 28.7 times its price-to-earnings (P/E) ratio and 23.6 times its price-to-cash (P/C) reserves. Within the Magnificent Seven, Alphabet and Meta Platforms stand out as reasonably priced, while Tesla and Nvidia appear significantly more expensive:
|
Magnificent Seven Stock |
P/E Ratio |
P/C Ratio |
Market Cap |
|---|---|---|---|
|
Alphabet |
23.7 |
23.2 |
$2.16 trillion |
|
Meta Platforms |
27.8 |
28.4 |
$1.48 trillion |
|
Tesla |
88.0 |
32.7 |
$1.11 trillion |
|
Nvidia |
69.3 |
103.2 |
$3.59 trillion |
Data source: Finviz.com on Nov. 9, 2024. P/E Ratio = price-to-earnings ratio. P/C Ratio = price-to-cash ratio.
The stock market heavily relies on these seven companies, and their influence is growing. If giants like Nvidia or Microsoft face challenges, the entire market could react significantly. This scenario reflects the caution Hartnett offered to clients 18 months ago.
Be intentional with your investments, especially in high-growth areas like AI and electric vehicles. Diversification can protect against market downturns while fostering long-term wealth. Hartnett’s Magnificent Seven metaphor serves as a reminder: Though these stocks appeared promising in spring 2023 (and still do), they could also present future risks.
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Bank of America is an advertising partner of Motley Fool Money. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet, Amazon, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Bank of America, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
