Magnificent Seven Leadership Intact
The Magnificent Seven, collectively and individually, have enjoyed an incredible bull market since the S&P 500’s bear market closing low on October 12, 2022. The Bloomberg Magnificent Seven Index has outperformed the average S&P 500 stock by almost 130% and the average Nasdaq 100 stock by roughly 105% since October 12, 2022 through January 23, 2025. While the Magnificent Seven has held up on a relative performance basis since its closing record high on December 17, 2024, parsing through the names individually can provide clues on the group’s next steps heading into 4Q’24 earnings.
Lastly, Apple (AAPL) has corrected back to support at the 200-day moving average while recently making 7-month relative lows. AAPL reverting from oversold conditions while outperforming or underperforming the S&P 500 can inform how sustainable the rally may be.
On balance, price action has been positive but should continue to be monitored.
Expected Growth Still Robust
For the fourth quarter of 2024, the Magnificent Seven are expected to report an aggregate net income growth rate of ~22% year-over-year. While down from the group’s high watermark of ~57% net income growth in 4Q’23, the double digit growth rate has been embraced by investors, especially when compared to the lack of net income growth from the S&P 493.
Looking ahead, the Magnificent Seven currently maintain the edge in expected annual net income growth. For 2025, the Magnificent Seven are expected to post 18.0% growth versus 10.8% for the S&P 493. 2026 estimates paint a similar story— the Magnificent Seven are expected to grow 17.1% against 12.9% for the S&P 493.
Slowing Growth and Tougher Comps
Despite high growth expectations, the path forward for the Magnificent may be tricky. As noted, the Magnificent Seven’s aggregate net income growth, while in double digit territory, is decelerating. A consequence of posting a series of strong quarterly prints, the comparisons for the Magnificent Seven are getting harder. Narrow misses or lower-than-average surprises could weigh on the individual names given their higher-than-market multiples (though we acknowledge that relative valuations are notably down from their 2023 peak). The group’s valuations could take a hit if they are not able to deliver on high expectations.
Capital Expenditures versus Shareholder Return
In our view, investors will be increasingly focused on the Magnificent Seven’s capital expenditure and R&D dedicated to artificial intelligence (AI) initiatives. Microsoft President Brad Smith wrote in a recent blog: “In FY 2025, Microsoft is on track to invest approximately $80 billion to build out AI-enabled datacenters to train AI models and deploy AI and cloud-based applications around the world.”
On January 24, Mark Zuckerberg announced that Meta Platforms is planning to invest $60-65 billion in capex for 2025 while having the “capital to continue investing in the years ahead.” This is above the Bloomberg average analyst estimate of $51.31 billion. In our opinion, the Magnificent Seven will continue to be scrutinized for growing capex numbers, but only if it comes at the cost of shareholder return.
Despite difficulty for the Magnificent Seven to consistently exceed higher standards for growth, it remains to be seen if the S&P 493 provides a compelling enough (and durable enough) growth narrative to catalyze a broader investor rotation. In our view, the competitive advantages of the group have been influential in allowing the Magnificent Seven’s valuation to persist at a premium to the S&P 500. Meanwhile, the Magnificent Seven driving innovation and growth could continue to be supportive to the individual names of coming months and quarters.
Over coming quarters, we will be monitoring if rising capex can translate into higher revenue, margin expansion, and profit growth. For now, the market is in wait-and-see mode. Earnings revisions at the stock and group level can serve as a more timely indicator in the intermediate term. Durable moves lower in annual and quarterly earnings estimates could be a sign of future turbulence.
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Glossary:
Bloomberg Magnificent 7 Price Return Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).
Bloomberg US Large Cap ex Magnificent 7 Price Return Index is a float market-cap weighted benchmark designed to measure the most highly capitalized US companies, excluding members of the Bloomberg Magnificent 7 Index.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.
The NASDAQ 100 Equal Weighted Index is the equal weighted version of the NASDAQ 100 Index. Index contains the same securities as is in the NASDAQ 100 Index but each security is set at a weight of 1.00% of the index on a quarterly basis.
The relative strength index (RSI) is a momentum indicator used in technical analysis. RSI measures the speed and magnitude of a security's recent price changes to detect overbought or oversold conditions in the price of that security. In addition to identifying overbought and oversold securities, the RSI can also indicate securities that may be primed for a trend reversal or a corrective pullback in price. It can signal when to buy and sell. Traditionally, an RSI reading of 70 or above indicates an overbought condition. A reading of 30 or below indicates an oversold condition.