For a while now, six big technology stocks and one carmaker have been traded as the “magnificent seven”. And it’s true that these companies are writing an exciting stock-market story. Yet it would be rather reckless to rely solely on such “market heroes” when investing.
The classic 1960s Western “The Magnificent Seven” tells the story of seven gunslingers. It’s about the fight against an overwhelming force of bandits who, after painful losses, are ultimately driven off. The film was a huge box-office success. Hero stories simply go down well.
Since last year, the film’s title has been circulating on the equity markets as a buzzword. The “Magnificent 7” refers to the market heavyweights Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia and Tesla. Michael Hartnett, an analyst at Bank of America, coined the term to sum up the market dominance of the seven companies. It didn’t take long before there was a dedicated index – and, of course, corresponding investment products, too.
The stock-market story of the “Magnificent 7” really is remarkable: if you take the performance of the seven companies out of the S&P 500, the index’s gain in 2023 would have been only half as large. Together, at the start of February they reached a combined market value of around 13 trillion US dollars. For comparison: apart from the USA and China, no country has a higher gross domestic product. So it’s hardly surprising that the quarterly figures of these seven companies attract as much broad attention on the markets as, otherwise, only economic data does.
Favourites can change quickly
But buzzwords like the “Magnificent 7” can quickly lead to false conclusions. They direct attention to a very small selection of companies. Here and there, the impression is created that these are a “sure bet”. But that, of course, isn’t true. Because the popularity of individual stocks can change quickly. Take Tesla, for example: if you look at the performance from early January to the end of December 2023, the price gain was over 100 percent. Change the period under review and look back, say, on 7 February this year at the preceding twelve months, and the stock was down by around six percent.
In any case, the business models as well as the specific opportunities and risks of the seven companies are very different. At chipmaker Nvidia, for example, it was above all advances in artificial intelligence that helped fuel the stock’s boom. However, Nvidia is heavily dependent on supplies from Taiwanese chip producer TSMC – and thus on any political tensions between Taiwan and China not disrupting the supply chains. Artificial intelligence is also the topic that has given Microsoft’s stock fresh momentum. But who will come out ahead in this megatrend in the future is far from decided.
An investment strategy for all eventualities
Which companies will have dominated developments in 2024 – and in which direction – will only be possible to say precisely in hindsight. What is clear: the prices of the “magnificent seven” already reflect very ambitious expectations for the companies’ further earnings growth. The risk of disappointment is therefore comparatively high.
Return opportunities always come with risks. In your investment strategy, it is therefore advisable to optimise the balance between return opportunities and risks as far as possible in line with your individual risk profile. That is exactly what happens in quirion’s global ETF portfolio. Through ETFs, it also contains the “Magnificent 7”. Their weight in the overall portfolio, with its 8,132 stocks, amounts to a share of 9.22 percent.
This means that, when prices rise, the “magnificent seven” make an important positive contribution to performance in the global ETF portfolio. But if individual share prices fall, the risk of loss is lower than in more heavily weighted portfolios. In any case, limiting yourself to supposed “market heroes” is far too great a gamble for building wealth systematically.
