This Week on Wall Street... The Magnificent Split
Dear subscriber,
It may be time to retire the "Magnificent Seven."
Because these market leaders seem to be going through a breakup. Some of them continue to fly higher... while others are falling behind.
As I'll explain, this divide tells us something crucial about the market.
Specifically, we may be looking at a "changing of the guard" with the world's top companies. And investors need to take heed... because many are overweight the current crop of market leaders.
Let's start by looking at the evolution of this group of tech stocks...
Before the Magnificent Seven, there was "FANG"... which stood for Facebook, Amazon (AMZN), Netflix (NFLX), and Google. These companies saw rapid growth as they dominated the tech world.
Then Apple (AAPL) picked up some steam, and FANG became "FAANG." Microsoft's (MSFT) pivot to the cloud ramped up its valuation, and we moved to "FAANGM."
Facebook became Meta Platforms (META). Google became Alphabet (GOOGL). Netflix got the boot as it started lagging behind the rest of the group. And someone tried to change FAANGM to "MAMAA"... though that moniker didn't really stick.
Then Tesla (TSLA) and Nvidia (NVDA) joined the party... and gone was the pronounceable acronym. Amazon, Meta, Alphabet, Nvidia, Apple, Tesla, and Microsoft became the Magnificent Seven.
The term was coined by Bank of America analyst Michael Hartnett after the Western film of the same name. (It's still an incredible watch... the 1960 original, not the 2016 remake.)
Since the bottom of the pandemic crash, the high-flying Magnificent Seven have walloped the S&P 500 Index by nearly four times over...
That incredible performance has told us a lot about the market over the years.
After all, these businesses were (and still are) far from similar... It wasn't like we had a group of seven semiconductor stocks all running up because the industry was hot.
Yes, the Magnificent Seven are all tech companies. But beyond that, they're very different...
Meta runs social networks, while Alphabet is the king of search. Apple makes iPhones and other consumer tech. Nvidia makes semiconductor chips. Tesla makes electric vehicles. Microsoft sells software. And Amazon does, well, almost everything.
On a deeper level, though, there are things in common...
For one, these stocks showed that having a huge audience is extremely valuable.
Meta and Alphabet, for instance, advertise to billions of people via Facebook, Instagram, Google Search, and YouTube. Amazon uses its massive online marketplace to funnel users to its other businesses... like Prime Video, Audible, Amazon Fresh, and more.
In other words, these companies' platforms connect their huge user bases with other businesses, and they make big profits because of it.
Next, three of the Magnificent Seven have cloud-computing platforms – namely Amazon, Microsoft, and Alphabet. And their cloud profits have been a big driver of recent returns... That shows the rising demand for compute in today's world.
Lastly, all seven companies have massive scale. The biggest just keep getting bigger... showing that our tech industry has trended toward a winner-takes-all system.
But set aside the specific businesses, and there have also been things happening with these stocks...
They got so big, and became such a huge part of the broader market, that any investors who wanted to keep pace with the benchmark simply had to own them.
Even if you didn't care to own them... you still likely did via a retirement account, pension fund, or any index fund that tracks an index holding those stocks.
And that has continued to send more and more dollars to these companies every single day... creating a self-reinforcing cycle.
You could have even argued that these stocks couldn't go down because they hoovered up so much capital inflow.
But now, the Magnificent Seven is splitting up.
The make-or-break factor? How close they sit to AI.
On the year, the stocks most associated with AI – Nvidia, Microsoft, and Meta – are in the lead...
As the leading maker of graphics processing units ("GPUs") – which are crucial to AI technology – Nvidia is the central cog in the AI universe.
Microsoft sells cloud-computing services to OpenAI and other AI companies so they can train and deploy their models.
And Meta started strong with its large language model, Llama. It fell behind a bit in the AI race, but now it's spending billions to catch back up by hiring every talented AI engineer in Silicon Valley.
Alphabet and Amazon fall in the middle. Alphabet has great AI models and tools based off Gemini. But many consider AI a threat to its core search business. (Alphabet's management says it's not.)
And though its cloud-computing operation has seen growth from other companies' AI use, Amazon is behind on its own AI innovation.
On the lagging side, Apple and Tesla are down substantially over the year. Apple has largely whiffed on its AI products – a topic we've covered before. And Tesla has lost an opportunity in AI, as Elon Musk has built his xAI as a project separate from the electric-vehicle company. (Not to mention, the company has plenty of problems in its auto business and otherwise.)
It would've been perfectly reasonable to argue that the Magnificent Seven or the AI trade had gotten a little overheated.
But instead, AI has powered some of the Magnificent Seven even higher.
If AI is a bubble – it's not popping yet. It's continuing to drive certain companies higher... while leading others to fall behind.
The saga of names and acronyms proves that market leadership doesn't last forever.
If you look at the biggest companies of any decade, they're mostly names you know... but that no longer dominate the market.
In the 1980s, it was International Business Machines (IBM) and AT&T (T). In the 1990s, it was mostly Japanese companies like Toyota Motor (TM). In 2000, it was Microsoft, General Electric, and Walmart (WMT). In the 2010s, ExxonMobil (XOM) took the top spot, followed by PetroChina and Apple.
In any of those decades, you would've looked at those huge businesses and thought... well, yeah, these will be the biggest companies forever.
But the leaders today won't be the leaders forever.
From an investing standpoint, you should never put all your eggs in one basket – especially with stocks like the Magnificent Seven, which combined currently trade at an expensive 33 times earnings.
The S&P 500, by comparison, trades at 24 times earnings. But if you take out the Magnificent Seven, the remaining 493 stocks have an average price-to-earnings ratio of 21. That's much more affordable.
And there are great deals in certain sectors, too... Health care stocks trade at 17 times earnings. International stocks trade at 15.5 times earnings.
If the AI story is true, the leaders today are going to build up this technology. It's going to spread through the economy and business world and make companies more efficient and more profitable.
So yes, you should bet on AI.
But with the gambler mentality prevalent among so many investors... and the recency bias you can get from just watching the past few years of returns... I fear that many investors own nothing but the Magnificent Seven.
The only constant is change. And that goes for the market leaders as well. You don't want to be overallocated to just these stocks when the tide eventually shifts.
What Our Experts Are Reading and Sharing...
A lot of people are skeptical of the official inflation stats. Things feel more expensive than the reported data shows. Well, according to this analysis of nearly 2,500 items listed on Amazon, prices on low-cost goods have been ticking higher. Prices started rising after the tariffs were introduced, even though Amazon said it would keep prices low.
Markets are coming to life in weird ways. A hedge-fund manager started a thread on social platform X about Opendoor Technologies (OPEN)... and the stock rose more than 700%. American Eagle Outfitters (AEO) announced a fall-clothing campaign with actress Sydney Sweeney... and the stock added $200 million in market cap. Stansberry Research's own Corey McLaughlin and Nick Koziol say it's the return of the meme-stock mania.
In other news, a tech founder was using software company Replit's AI coding agent to code a new app for his business. The AI agent went rogue, ran an unauthorized command, deleted the company's entire database, then "lied" about it.
New Research in The Stansberry Investor Suite...
Semiconductor stocks are hot.
Nvidia is soaring, as we've covered. Broadcom (AVGO) has surged so high some folks are considering it a new Magnificent Seven stock. And in general, it seems like semiconductors just can't miss.
But being in a hot industry doesn't always make for a good investment...
In this week's Stansberry Investor Suite research, we look at a chipmaker we highlighted about a year ago in a special report for subscribers to The Quant Portfolio.
In that report, we called it one of the top stocks to avoid. The company was bleeding cash, buried in debt, and falling further behind financially despite rising revenue.
Since then, its stock is down 90% and the company has filed for bankruptcy protection.
How can a stock in the red-hot semiconductor industry fail so badly?
It's simple. And you can see it all just by looking at this company's Stansberry Score – as we do in today's issue.
We look at our original analysis, explain what has changed today (and what hasn't), and discuss why investors are foolishly pricing in a comeback for this company.
Importantly, we'll show you how our Stansberry Score can help you avoid similar risks.
Stansberry Investor Suite subscribers can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
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