[Global Focus] Sorting the Wheat from the Chaff in the 'Magnificent 7' Amid S&P Rise

S&P 500 Surpasses 5000 Thanks to MS and Nvidia
Mixed Fortunes Within the Magnificent 7... "Dotcom Bubble" Concerns
"Market to Rise Even After the 7 Major Stocks' Rally Ends"

The U.S. S&P 500 index surpassed 5000 for the first time ever on the 9th (local time). This is due to the U.S. economy experiencing a soft landing and, in particular, the stock market being led by giant AI-related tech companies (Big Tech) such as Microsoft (MS) and Nvidia. MS overtook Apple to become the company with the highest market capitalization and also surpassed Apple's all-time highest market cap ($3.09 trillion). Nvidia also recorded its highest stock price ever.

Last year, the generative AI boom led to the rise of the seven major tech stocks, known as the 'Magnificent 7.' These include Nvidia, Meta, Amazon, MS, Google, Apple, and Tesla. Additionally, concerns about inflation and interest rates drove investors to flock to the safest-looking Big Tech stocks, further boosting the Magnificent 7.

According to Bloomberg, the generative AI market was only $40 billion (about 53 trillion KRW) in 2023 but is expected to grow to $1.3 trillion (about 1,732 trillion KRW) in 10 years. In the short term, market growth could increase by an average of 42% annually, driven by AI training infrastructure, and in the mid-to-long term, it is expected to shift to large language models (LLM), digital advertising, and inference devices for software and services. Swiss financial group UBS forecasts AI industry revenue to reach $420 billion (about 559 trillion KRW) by 2027. Initially, related revenue was expected to expand from $28 billion (about 37 trillion KRW) in 2022 to $300 billion (about 400 trillion KRW) in 2027, but the forecast was revised upward within a year. If this continues, the annual growth rate will rise from 61% to 72%.

However, as the Magnificent 7's march continues, there are calls for 'separating the wheat from the chaff' among them. Until last year, they were treated as a single group, but aside from being tech stocks that surged dramatically after the COVID-19 pandemic and their AI relevance, they have few commonalities. For example, Nvidia is directly linked to AI prospects, Apple, which mainly focuses on smartphones, is a kind of premium consumer goods stock, and Amazon combines retail and cloud computing.

Above all, there are gaps in stock prices. Especially after the Q4 earnings announcements last year, fortunes among the Magnificent 7 have sharply diverged. Nvidia, Meta, MS, and Amazon, which posted record-breaking earnings, saw their stock prices rise, but Tesla and Apple experienced declines. Nvidia, Meta, MS, and Amazon rose about 20% since the beginning of the year. Meanwhile, Apple ended its year-long negative growth streak but was weakened by disappointing sales in China, and Tesla slipped to 10th in market cap due to warnings of slowing growth and reports of German software company SAP halting vehicle purchases.

Chris Beauchamp, Chief Market Analyst at IG Group, said, "Tesla and Apple, which were the most favored by investors over the past decade, have become the biggest obstacles to the index," adding, "The market has started to look at the Magnificent 7 not as a single entity but by examining the strengths of individual companies. It is important to evaluate companies based on their strengths, weaknesses, and financial performance." He continued, "As investors demand concrete results and clear profitability, the era of speculative investment based solely on potential is coming to an end."

Anti Chubali, Multi-Asset Strategist at State Street Global Markets, said, "We are seeing the Magnificent 7 begin to split," adding, "Not all of them will perform well this year."

In fact, signs that the market dominance of the Magnificent 7 is not what it used to be are emerging here and there. A representative example is pharmaceutical company Eli Lilly, whose stock price recently surged due to obesity treatments. There are also voices suggesting that Berkshire Hathaway, led by Warren Buffett, and semiconductor company Broadcom should be included in the Magnificent 7 instead of Tesla.

The Outdated Magnificent 7... AI 5, MnM Era

As stock prices diverge among the seven companies, opinions have emerged that the view of grouping them as the Magnificent 7 is outdated. Some even suggest renaming it the Magnificent 6 by excluding Tesla.

Glenn Catcher, Corporate Analyst at Light Street Capital, proposed the 'AI 5' consisting of MS, Nvidia, AMD, TSMC, and Broadcom as stocks to watch. Except for MS and Nvidia, these are new companies not included in the original Magnificent 7. AMD is accelerating AI semiconductor development following Nvidia, TSMC is a Taiwanese semiconductor foundry company that manufactures AI semiconductors on contract, and Broadcom is the world's fifth-largest semiconductor company, strong in networking and server connectivity semiconductors. Recently, it even surpassed Tesla in market cap.

Josh Beck, Analyst at Raymond James, said investors should pay attention to three AI-related companies called 'MnM.' This is a play on the initials of MS, Nvidia, and Meta, likened to the chocolate candy M&M. MS attracted much attention for investing in OpenAI, Nvidia GPUs are essential for powerful AI computational processing, and Meta posted record earnings and initiated its first dividend.

AI, the Second 'Dot-com Bubble'?

There are also criticisms that the Magnificent 7 itself is an illusion. Quant strategists at JPMorgan Chase recently stated that the dominance of the top 10 stocks, including the Magnificent 7, in the U.S. stock market is becoming similar to the dot-com bubble. These top 10 stocks accounted for 29.3% of the MSCI USA index at the end of December last year, slightly below the 33.2% peak in June 2000 during the dot-com bubble peak.

They said, "The key point is that the market is clearly extremely concentrated in these 10 stocks, which poses a real threat," adding, "Just as a limited number of stocks drove most of the MSCI USA index's rise, a decline in their stock prices could cause a drop in the entire stock market."

Vincent Mortier, Chief Investment Officer at Amundi SA, warned that "it feels like the early 2000s," saying the global stock market is overvalued. He also pointed out that expectations for the Magnificent 7 are based on assumptions. For example, it is uncertain whether Nvidia will continue to hold 80-90% market share in the AI semiconductor sector. In the early internet era, AOL and Yahoo dominated the market, but later Google surged ahead.

However, some believe it is too early to worry about an 'AI bubble.' Keith Lerner, Co-Chief Investment Officer at Truist, said on Yahoo Finance Live, "There are definitely speculative parts in the market, but there is no AI bubble yet," adding, "We are still in the early stages of AI." He continued, "We have infrastructure and chips, but the next step is which companies will amplify this."

The Market After the Magnificent 7

Even though it is difficult to compare to the dot-com bubble era, investors are concerned about the excessively high dominance of the seven major stocks. They worry that when their upward momentum ends, it could put the brakes on the overall U.S. stock market. However, Yahoo Finance assessed that although the Magnificent 7's dominance is high, investors' concerns are premature at this point.

According to Brian Belski, Chief Investment Strategist at BMO Capital Markets, historically, even if the top 10 leading stocks fall, the S&P 500's returns the following year have been quite good. According to Belski's chart, since 1992, after the average contribution of the top 10 stocks in the S&P 500 reached its peak, the index rose an average of 14.3% that year. The only time the S&P 500 posted negative returns the following year was during the dot-com bubble period.

Belski said, "Some investors may worry that the market will struggle if the Magnificent 7 do not lead, but analysis shows that the S&P 500 performed well even after the top 10 stocks' performance peaked."

Ben Snyder, Equity Strategist at Goldman Sachs, pointed out that although the current degree to which top stocks are driving the market is unusually high, the situation where a few top stocks lead the S&P 500's rise is not entirely new. This has been how the U.S. stock market has trended upward so far.

He said, "This is one of the reasons why the S&P 500 and the U.S. stock market have been bullish for years," adding, "New companies grow, take up a larger share of the index, and lift the market. Also, new technologies and new businesses emerge, grow, and will lift the market even higher." He added, "This scenario is likely to materialize as investors gain more confidence in the Federal Reserve's path for interest rate cuts."