Through the first two months of the year, the Magnificent Seven Stocks have returned 14%, while non-profitable tech stocks are down 11%. Six of the Mag 7 companies beat consensus estimates for revenue. Specifically, the Magnificent Seven generated 15.0% sales growth year over year on average, while the other 493 generated a much more modest 2.7%.1 In addition, these market heavyweights have much higher operating margins than the rest of the market (22% versus 12%). Perhaps most importantly, the Magnificent Seven grew their margins over the last year while the remaining 493 saw a modest decline. Revenue and margin growth have been the key drivers of these seven stocks’ outperformance as we published in December 2023. Simply put, this has been more about fundamentals than AI hype.
Magnificent Seven Stocks Continue to Led
Source: Bloomberg, as of February 29, 2024.
Concentration Concerns
To a lot of negative headlines, the Magnificent Seven stocks contributed 57% of the S&P 500 Index’s return in 2023. Year-to-date, these seven market leaders have produced 44% of returns, which may still be high by historical measures, but is trending lower.2 While naysayers may point to overstated company estimates, one area of pushback that lacks evidence relates to concerns regarding overconcentration in the market. Rather, in this case, the seven stock market leaders represent considerably more than seven companies when one takes a look under the hood. In fact, it is more like the “Magnificent Hundreds” driving the U.S. economy and stock market.
For example, Amazon owns more than 100 companies across various sectors, including technology, groceries, media, and medicine. Notable acquisitions include Whole Foods Market, Zappos, Twitch Interactive, MGM Holdings Inc., and Audible. Apple owns a significant number of companies, focusing on smaller technology firms that can be integrated into its products, such as Siri Inc., Beats Electronics and Beats Music, and Shazam. Alphabet has invested in over 200 companies, including YouTube. By way of example, the below figure highlights the diversity of Alphabet’s revenue streams including from search advertising, YouTube, Google AdMob, Google Play, and Google Cloud.
Alphabet Revenue Comes from a Variety of Companies
Source: Alphabet Inc., for the fiscal year ended December 31, 2023.
Dispersion Emerging
While some are concerned about concentration ,others are pointing to dispersion, with shares of Nvidia besting Tesla by 85% over the last three months. This sizable spread, combined with the fact that Apple and Alphabet have been relatively weak, have another group of investors and traders questioning the resiliency of the Magnificent Seven. This may be another example of when narratives do not align with the data. Interestingly enough, the average three month return spread of the best and worst performing Magnificent Seven stock is over 47%. So the 85% difference may be high at first glance, it is not outside of what has occurred historically.
Nvidia’s Leading, While Tesla’s Lagging
Source: Bloomberg., as of February 29, 2024.
What’s Next?
So while it is hard to ignore their dominance, the Magnificent Seven companies continue to grow their toplines faster than their smaller peers. As noted above, they are doing so with improving margin profiles as well. These two factors of fundamental growth are incredibly powerful in a low economic growth world with much higher interest rates than the previous decade.
To be fair, the 29 times forward price-to-earnings for the Magnificent Seven may look stretched if the group cannot continue delivering on their promise of consistently high sales and margin growth. If they do, bulls may keep the upper hand as the haves and haves not thesis plays out and AI remains in its early days of adoption. However, we recognize that this will not always be the case.
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