Last week powerhouse companies such as Microsoft, Alphabet, Apple, Amazon, and Meta unveiled their Q4 2023 financial results. The spotlight was on these giants, collectively known as the Magnificent Seven, which include Nvidia and Tesla, as they have been the driving force behind the remarkable 107% surge in market returns throughout 2023.
However, as investors revel in the recent earnings beats, a critical question looms large: can these stocks maintain their glory days over the next year?
The Magnificent Seven’s stellar performance in 2023 has undoubtedly set the bar high, but it is precisely this elevated expectation that could become a double-edged sword.
The market has grown accustomed to these companies outperforming expectations, making it increasingly challenging for them to surpass the lofty standards they have set.
Investors may be left wondering whether the recent beats in earnings per share (EPS) are sustainable or if they’re merely a temporary respite in the face of mounting pressure.
Then there’s the concentrated positioning of these stocks in portfolios which adds another layer of complexity.
With around two-thirds of the S&P 500’s performance attributed to the Magnificent Seven, any hiccup in their trajectory could have ripple effects across the broader market.
Diversification is a key tenet of risk management, and an overreliance on a handful of stocks, despite their past brilliance, poses inherent risks. As these giants navigate the challenges of maintaining their momentum, investors should tread cautiously and consider diversifying their portfolios to mitigate potential downsides.
A second concern arises from the evolving landscape of technology and the potential impact of artificial intelligence (AI) on the market. While the Magnificent Seven have been at the forefront of technological innovation, the question remains whether they can adapt to the evolving narrative around AI.
It’s not just about chipmakers anymore; AI’s influence is permeating various sectors, promising transformative changes in industries ranging from healthcare to finance.
Investors need to recognise that the allure of AI extends beyond the traditional tech giants.
Companies leveraging AI technologies for operational efficiencies, customer insights, and product innovations are emerging as attractive investment opportunities.
As the AI revolution unfolds, the Magnificent Seven must prove their adaptability and continued relevance in a landscape where success hinges on more than just raw computing power.
The next wave of tech leaders might emerge from unexpected corners, challenging the dominance of the established giants.
Lastly, the macroeconomic backdrop plays a pivotal role in shaping market dynamics.
The prospect of declining interest rates in the coming year may offer a lifeline to sectors and companies that lagged behind the Magnificent Seven in the previous rally.
As interest rates decrease, industries sensitive to borrowing costs, such as housing and manufacturing, could experience a boost.
Apple and Tesla are the most under pressure of the Magnificent Seven – they have lost 4% and 11% respectively this year – as they are two most exposed to China where they have massive competition from rival companies, and also because broader discretionary spending on electronics remains uncertain.
But this all said, while the Magnificent Seven may not replicate the meteoric highs of 2023, they are poised to remain formidable players for investors around the world.
Their maturing market positions, commitment to innovation, resilience in economic downturns, and alignment with global megatrends, position them for sustained success in 2024 and for years to come.
Nigel Green is deVere CEO and Founder
Also published on Medium.
