The Rise of the Magnificent Seven

Published: April 10, 2024

In several of our recent monthly Investment Outlooks, we have made reference to the Magnificent Seven – the mega-cap tech growth stocks driving the U.S. stock market’s positive returns, fueled by the impact of Artificial Intelligence (AI). This trend is significant and likely to continue to affect market performance in the future.

From FANG to FAANG to Magnificent Seven

CNBC Commentator Jim Cramer is credited with introducing the FAANG (Facebook, Amazon, Apple, Netflix, and Google) acronym over a decade ago, denoting a group of large-cap tech growth outperformers. The original FAANG stocks, with Facebook and Google now known as Meta and Alphabet, have been joined by Nvidia and Tesla to form the Magnificent Seven, referencing the leading group of stocks driving 2023 market returns.

AI-driven Magnificence

The stock performance of these companies has been strongly linked to technology, the growth in artificial intelligence (AI) and its applications, and future AI investments. Microsoft’s big bet on OpenAI exemplifies this, while Amazon’s Web Services has a strong focus on marketing AI and machine learning (ML) tools. Meta has declared that AI is its top theme for 2024, while Google has been investing in AI for many years to better understand and predict consumer behavior and preferences. Advancements in AI, namely Large Language Models (LLMs), have also resulted in new and innovative alternatives to the traditional search engine, an area of focus for both Microsoft and Google. While some research analysts believe that Apple’s emphasis on AI has lagged, recent developments suggest a shift towards bolstering AI initiatives.

Nvidia may be less well-known than the others in the Magnificent Seven, yet its significance is profound. Nvidia designs sophisticated computer chips called graphic processing units (GPUs), and that, along with an industry-leading software suite, enable the accelerated processing of data. These chips are used in a wide variety of applications, including video game platforms, personal computers, servers, and mobile devices such as cell phones and tablets. The GPUs were primarily used for displaying high-fidelity graphics in video games and other niche areas such as cryptocurrency mining. However, more recently, the demand for chips in data centers to power the AI behind Large Language Models (LLMs) such as ChatGPT has created an explosion in demand.

While Tesla does not sound like a traditional tech company, as a designer of electric vehicles, charging stations, and energy supply systems, their implementation of cutting-edge computers, chips, sensors, and software used to control and automate their vehicles puts them at the vanguard of AI development. Tesla has also heavily invested in AI chip design and developing AI robots.

What Goes Up Can Go Down

Just how magnificent are these seven stocks? In 2023, these seven stocks were up 76% versus 12.5% for the remaining 493 companies in the S&P 500. (In 2023, the S&P 500, as a whole, was up 26%.) However, performance that is “magnificent” during one period can be decidedly less so during others. In 2022, the Magnificent Seven declined 40%, while the remaining 493 companies in the S&P 500 declined only 12%. (In 2022, the S&P 500 was down a total of 18%). Concentrating investments in what seems like the “hot” stocks can potentially pose significant risks.

The Great Divide

In recent months, substantial dispersion has developed in the returns of the Magnificent Seven companies. The top four performers, Microsoft, Amazon, Meta, and Nvidia, continue to generate strong profits and growth and have returned 30.7% through the end of Q1 2024, while Apple, Alphabet, and Tesla have lagged, returning -10.8%, 8.05%, and- 29.25%, respectively for the same period. Excluding the Magnificent Seven, the remaining 493 companies in the S&P 500 were up 9.4% through the end of Q1 2024.This dichotomy has led some to advocate for a subset, known as the “Fab Four”, eliminating Apple, Alphabet and Tesla. In recent quarters, investors have become increasingly confident in Microsoft’s AI growth trajectory, allowing it to regain the crown from Apple as the most highly valued U.S. company. Nvidia continues to benefit from extremely strong AI chip demand as companies rush to build AI-powered datacenters. Meta’s core advertising business has been performing well, allowing the company to declare its first-ever dividend payment. While Meta’s significant investments in generative AI investments will not have a meaningful impact on their profits in 2024, the company believes that this investment will pay off over the long term. At the other end of the spectrum, Apple faces challenges due to its delayed entry into the AI space, as well as slowing demand for new iPhones. At the same time, Tesla has suffered from slowing demand for EV vehicles, recently reporting its first negative quarterly delivery growth since the beginning of the pandemic in 2020. Alphabet falls in the middle, with double-digit revenue growth in Q4 of 2023, led by sales through search and ad revenue. Alphabet’s price dropped from the end of January through early February in part due to concerns over Google’s ability to sustain ad revenue and the competitive threat from generative AI to Google’s traditional search business.

Performance of Apple, Tesla, and Alphabet Versus Total Magnificent Seven Returns

A Focus on the Long-Term Combined with A Close Watch on the Short-Term

At Klingenstein Fields Advisors, we strive to build carefully constructed, well-diversified portfolios that are designed to help you achieve your long-term goals, while also remaining sensitive to the current market environment and potential short-term tactical investment opportunities. We welcome the occasion to discuss the current market situation, our perspectives and thoughts on the future, and what this means for your portfolio. Please reach out to us at 212.497.7000 with any questions or comments you may have.

Important Disclosures

This material is provided for informational or educational purposes only and should not be construed as investment, accounting, tax or legal advice. Always consult a financial, tax and/or legal professional regarding your specific situation. This communication is not intended as a recommendation or as investment advice of any kind. It is not provided in a fiduciary capacity and may not be relied upon for or in connection with the making of investment decisions. Nothing herein constitutes or should be construed as an offering of advisory services or an offer to sell or a solicitation to buy any securities or a recommendation to invest in any specific investment strategy. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future returns. The views expressed herein are as of a particular point in time and are subject to change without notice. The information and opinions presented herein are general in nature and have been obtained from, or are based on, sources believed by Klingenstein Fields Advisors (“KF Advisors’) to be reliable, but KF Advisors makes no representation as to their accuracy or completeness. Although the information provided is carefully reviewed, KF Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided. KF Advisors represents two investment advisers registered with the Securities and Exchange Commission: Klingenstein, Fields & Co., L.P. and KF Group, LP. If you are a KF Advisors client, please remember that it remains your responsibility to advise KF Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.