The Magnificent Seven – eternal champions?
In financial jargon, the Magnificent Seven – a reference to the film of the same name – are seven US stocks endowed with two key characteristics: their massive market capitalisation, and their strong link to technology – a sector to which most of them do not actually belong.
Microsoft, Apple, Google, Amazon, Meta, Nvidia and Tesla constituted the major performance driver for the S&P 500 in 2023, contributing close to two thirds of its rise. And once again at the start of the current year, this limited number of stocks is making a significant contribution to the hike in the index. Excluding Tesla, these stocks account for close to half of the rise in the S&P 500 as of 25 January 2024.
The figures of this Magnificent Seven are vertiginous – their combined market capitalisation of close to USD 11 trillion is higher than that of any individual national market (logically, with the exception of the US market). Their market capitalisation exceeds the GDP of every country in the world, save the US and China. In the US flagship index – the S&P 500 – these seven stocks represent close to 30% of its weight, or the equivalent of the weight of the 400 smallest stocks. As of 25 January 2024, Nvidia is the biggest contributor to the performance of the S&P 500 since the beginning of the year, with a rise of around 25%. The same was true in 2023, when the US giant rose by 239%, driven by the demand for equipment destined for the development of generative artificial intelligence (AI).
In reality, whilst innovation is the common denominator for the Magnificent Seven, their characteristics differ. Some are industrials, such as Tesla – which operates in a sector that has been around for over a hundred years – and Nvidia, producing chips specifically for use in AI. Others such as Google, Microsoft and Meta offer purely digital services. And the last two operate at the crossroads of several businesses – Amazon at the intersection of e-commerce, logistics and the cloud, and Apple which is both a developer of digital products and a supplier of applications.
Their turnover and earnings will need to display stunning growth to justify such high valuations. Any disappointment may be harshly sanctioned. This is clear from the beating that Tesla received on the stock market after the announcement of disappointing results, despite its Model Y being the best-selling car in the world in 2023. Down 26% since the beginning of the year, Tesla is bringing up the rear in terms of performance in the S&P 500. Next week will be key to assessing the capacity of these companies to deliver results that live up to investor expectations, as five of them are scheduled to publish figures on 30 January or 1 February.
In the western film, “The Magnificent Seven” – based on Akira Kurosawa’s “Seven Samurai” – John Sturges depicts Mexican peasants who hire seven mercenaries to protect their village which is under threat from bandits. Only three of the mercenaries get out alive. Let’s hope for a happier outcome for Wall Street’s Magnificent Seven.
Final version of 26 January 2024 by Clément Inbona, Fund Manager, La Financière de l’Echiquier (LFDE).