The Magnificent 7 stocks continue to trade on a tear, with some of the heaviest hitters seeing shares only climb higher as 2024 begins. Yet even with anxiety about interest rates and a recession, these stocks have continued to provide growth.
However, investors should be worried.
Taking too much
The Magnificent 7, in short, continue to take up way too much room among United States stocks — specifically, the S&P 500. And it’s actually causing more risk for investors who have traditionally invested in the S&P 500 and its exchange-traded funds (ETF) to less risk.
The problem is that while the S&P 500 continues to trade higher, that’s largely in part from the performance of the Magnificent 7. These stocks are Apple, Amazon, Alphabet, NVIDIA, Meta, Microsoft and Tesla. Combined, these are all up around 70% as of writing.
Take them out of the S&P 500? The index would be up just about 6%. And that over-dependence is leaving the market vulnerable to a huge downturn should the Magnificent 7 see a drop in share price.
Why so much?
Investors have become heavily interested in everything to do with artificial intelligence (AI), and these companies support that growth in every way. Even Tesla, which is mainly focused on vehicles, has seen its chief executive officer, Elon Musk, dabble in the AI field.
But while these companies were able to garner interest and do well, elsewhere, other stocks were doing incredibly poorly. And that’s what made these seven stocks so “magnificent.” There was a shadow over the market, and light was provided by an interest in AI stocks. And with interest rates remaining high, these innovators provided relief.
To be fair, there are certainly benefits to owning these stocks. For instance, their balance sheets are superb, with tens of billions of dollars in cash. Further, while not immune from interest rates, these stocks are certainly less affected since they can finance their own growth.
Risk abounds
With so much focus on just a few stocks, this opens up the S&P 500 to just so much risk. And our portfolios as well. Should the Magnificent 7 falter, it could trigger another downturn in the market just as we thought we were on the other side.
Investors could see that these companies are overvalued, which they are. And that could cause this bubble to burst — something which has happened in the past, with “The Four Horsemen” in the late 1990s during the dot-com bubble.
All this isn’t to say that these companies are bad or good. They’re simply overvalued and taking up way too much market space. For a bull market to continue then, more stocks would need to join in the Magnificent 7 and that performance. And this won’t be likely until interest rates come down.
Until then, I would certainly stay on the sidelines and simply take your returns. Because until those interest rates come down in the United States and beyond, anything could happen. And it may not be good.
