31 January 2024
If you paid attention to stock market trends in 2023, you might have heard of the “Magnificent Seven” – and no, we’re not talking about the 1960 Western movie.
The Magnificent Seven refers to seven US technology companies that are dominating the global stock market. As of February 2024, they are:
- Alphabet (Google’s parent company)
- Nvidia (a US graphics chip-making company)
- Meta (formerly Facebook)
Together, these companies carry an extraordinary amount of weight in global markets.
Believe it or not, as of August 2023, their value equalled the combined stock markets of Canada, France, the UK, China, and Japan. The below graphic shows their value in the Global MSCI all-country world index, compared with that of those countries:
Source: the Guardian
Indeed, on 31 August 2023, these countries made up 17.3% of the global stock market, and the Magnificent Seven made up 17.2%. These tech stocks’ astonishing rise has captivated investors, and could even entice you into investing heavily in these seemingly unbeatable companies.
But before you act, keep reading to find out what you need to know about investing in the Magnificent Seven.
The value of the Magnificent Seven technology companies rose sharply in 2023
According to Fidelity, by December 2023, the Magnificent Seven’s collective value had risen by 68% over the course of the year. By comparison, world stock markets had seen just 10% growth (without counting these top seven tech stocks).
When one stock (or a group of stocks in the same asset class) rises sharply over a short period of time, this is often called an “investment bubble”, meaning a stock will receive inflated attention from investors over a short period before “bursting” and returning to slower long-term growth.
It’s difficult to tell whether the Magnificent Seven fall into the category of an investment bubble.
While some may say they are just another tech trend that will blow over, many of the products and services these companies offer form part of our daily lives in 2024. Social media platforms run by Meta and online shopping on Amazon, for example, might now seem irreplaceable.
So, while the Magnificent Seven did experience sharp growth in 2023, this is not to say that they are simply a bubble that is bound to burst.
Only time will tell how these seven stocks will perform in future; for now, let’s look at two things you might consider before investing in them.
2 points to consider before investing in the Magnificent Seven
1. A high concentration of technology shares could imbalance your portfolio
While on the surface of things, these are just seven companies that happen to be doing well, the Magnificent Seven actually provide a tricky landscape for those seeking to retain a fully diverse portfolio.
Crucially, these seven companies are strongly influencing the performance of US market indices, such as the S&P 500.
Indeed, a Reuters report says that as of December 2023, these seven stocks were responsible for two-thirds of the S&P 500’s 24% surge earlier in the year.
However, while these corporations are contributing to a boom in US markets at the moment, their heavy weighting could have the opposite effect later.
Reverse the circumstances and imagine if just one of these stocks dipped in value; the entire S&P 500 would likely fall significantly as a result, and global markets could even experience volatility too.
To exemplify this point further, the same Reuters report revealed that, according to Apollo Group data, 72% of the S&P 500’s stocks underperformed in 2023 – yet this relative underperformance was masked by the Magnificent Seven’s successes.
And, even if you are not directly buying shares in these seven companies, investing in a US or global tracker fund could still mean your portfolio’s performance is heavily influenced by their value.
So, while there is nothing “bad” about investing in the Magnificent Seven, a heavy weighting in these seven stocks (or in a US or global tracker fund more broadly) could make your portfolio more vulnerable to future volatility.
2. It may help to talk to an expert before investing in the Magnificent Seven
Seeing as the Magnificent Seven take up so much space in the global stock market right now, working with an expert could be a highly pragmatic move.
While they may provide an opportunity for investment growth in the short term, technology is a rapidly developing industry, meaning that these seven companies’ successes may not last forever. Remembering your long-term objectives could be useful in tempering your enthusiasm towards the Magnificent Seven’s current boom.
Of course, this is not to say that you should not invest in the Magnificent Seven, but rather that over-excitement in an investment context could lead to relative disappointment in the long run.
Ultimately, no matter whether you’re swimming with the tide or against it, a seasoned investment professional could help you navigate the stock market’s choppy waters. Our financial planners can help you curate a diverse investment portfolio with a view to meeting your specific financial goals.
To get started, just email firstname.lastname@example.org or call 0161 8080200.
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.