Who are the “Magnificent Seven” and why does it matter?

More than 60 years after the release of John Sturges’ Western classic, The Magnificent Seven, and following a handful of ill-fated sequels and the now obligatory remake, there is a new “Magnificent Seven” in town.

But move aside McQueen, Brynner, and Bronson, because today’s Magnificent Seven are a group of influential and high-performing stocks that dominate the technology sector and the US financial markets.

With a combined market value of nearly $13 trillion, the Magnificent Seven comprises Apple, Microsoft, Alphabet (Google’s parent company), Amazon, NVIDIA, Meta Platforms (Facebook/Instagram), and Tesla.

Having experienced huge growth in recent years, the group has a significant impact on the wider stock market and many investors are betting on this trend to continue, though some have warned about a potential market bubble.

Read on to find out more about the Magnificent Seven, why their market dominance matters, and why you might want to be cautious before adding their stocks to your portfolio.

The Magnificent Seven make up more of the global stock market than most countries

The Magnificent Seven are the seven biggest companies on the S&P 500 and are the dominant force on the US stock market.

CNBC reports that the combined market capitalisation of the Magnificent Seven would make it the second-largest stock exchange in the world.

The graph below illustrates the Magnificent Seven as a proportion of the global stock market against the stock markets of five high-income countries. You can see that, for example, the value of Apple alone is bigger than the combined value of every firm on the UK stock market.

Source: The Guardian

Their success is down to numerous factors, but is in part due to the technology boom of recent years and the companies’ respective achievements in innovation, adaptation, global reach, strategic acquisitions, and leadership.

The dominance of the Magnificent Seven has left the S&P 500 at its most concentrated in over 100 years

Forbes reports that at the end of 2023, the Magnificent Seven accounted for 29% of the S&P 500 index, meaning the S&P 500 is the most concentrated it has been for over 100 years.

Source: Forbes

A rising S&P 500 is generally regarded as positive, but when an index is led by a small number of companies, it can obscure activity beneath the surface. The index can rise even when a majority of companies fall, provided the market leaders continue to grow.

This works both ways, and during the later months of 2022, amid a brief panic surrounding the emergence of ChatGPT and Open AI, the relatively weak showing of the Magnificent Seven dragged the S&P 500 down.

Their undeniable influence on the market has led some to deem the Magnificent Seven to be indicative of a market bubble.

The rise of the Magnificent Seven is comparable with historical market bubbles

A stock market bubble usually occurs when the prices of stocks or other assets far exceed their intrinsic value, driven primarily by speculation, investor optimism, and buying activity.

The rise of the Magnificent Seven on the stock market could be indicative of a new market bubble, though some industry leaders have disputed this.

Business Insider reports that the Bank of America managing director and the man who first coined the term the “Magnificent Seven”, Michael Hartnett, has drawn parallels with the rise in the Magnificent Seven stocks and historical market bubbles.

The table below uses Hartnett’s data to compare the Magnificent Seven with historical market bubbles, based on their trough-to-peak value rise and their subsequent decline in value after the bubble burst.

Source: Business Insider

Not every market bubble bursts catastrophically, and, if they do, not every burst results in economic fallout.

However, a burst bubble can lead to market volatility, financial instability, recession, decline in asset prices, and wider economic consequences such as an increase in unemployment.

A diversified portfolio can help to mitigate the impact of market volatility and reduce the overall risk to your investments, while potentially also offering more stable returns.

The biggest companies don’t always maintain their status

Although there is no accurate way of predicting the future performance of the Magnificent Seven, we can look to the long-term performance of other companies that once held a similar position to gain an understanding of the longevity of elite stock market status.

Only three of the 10 biggest companies on the S&P 500 in 2014 remain in the top 10 today – Apple, Alphabet, and Microsoft – meaning the remaining seven have dropped off.

Furthermore, Microsoft is the only company from the top 10 companies in 2004 that remains in the top 10 in 2024.

Though we should be hesitant to draw conclusions about the future performance of the Magnificent Seven based on historical trends, the data suggests that not every member of the group will maintain their status, and their stocks may not be so strong in the future.

The Magnificent Seven are susceptible to risks

All stocks are open to risks. Currency fluctuations, cybersecurity, and geopolitical relations are just some of the factors that can influence all companies on the stock market.

However, large companies such as those in the Magnificent Seven are susceptible to particular risks given their size, leadership, and the nature of their sector.

The Magnificent Seven are concentrated in the technology sector

While the Magnificent Seven companies operate across various sub-sectors, they are primarily concentrated in the technology sector.

With rapid developments in artificial intelligence, technological capabilities, and applications for user data, the technology sector is increasingly at risk of regulatory pressure. So, any regulatory changes in the sector could have a significant impact on the stock value of each of the Magnificent Seven.

Moreover, solely investing in any sector can come with risks. It leaves your investments vulnerable to the volatility of that sector – diversifying your portfolio can help to smooth volatility as gains in one sector could offset losses in another.

The Magnificent Seven are vulnerable to key person risk

Some of the key players in the Magnificent Seven are particularly well known because of the status of their founder or CEO.

Elon Musk, Bill Gates, Jeff Bezos, and Mark Zuckerberg are all household names and are an integral part of the brand identity of each of their companies. If something were to happen to one of them, there would likely be an immediate impact on the company’s value.

For example, Tesla stock plummeted after Elon Musk’s controversial appearance on the podcast, The Joe Rogan Experience, which illustrates the risks of having a key person attached to the company’s brand.

There are benefits to working with a professional to diversify your portfolio

Although investing in Magnificent Seven stocks may have yielded high returns in recent months, it can pay off to diversify your portfolio, instead of getting caught up in the excitement of a few high-performing companies.

By focusing solely on established giants, you may miss out on emerging companies and sectors with significant growth potential.

If you would like advice on diversifying your portfolio, get in touch. Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.