Deconstructing The Magnificent 7

When Things Go Bad, Wealth Can Evaporate

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Table of Contents

• When Things Go Bad, Wealth Can Evaporate

• Three Things To Know Before We Go…

• And one more thing… Poll: Valuing The S&P 500

• Chinese Issue New Financial Threat to America

• Mailbag

I (Ross Hendricks) ended Monday’s Daily Journal by pointing out that in the past two years, without shares of the Magnificent 7 – Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), Tesla (TSLA) – the S&P 500’s back-to-back 20% annual gains would have been more like 5% on average in each of those years. 

Then I wrote, sharing the following chart to illustrate the point…

“Now, here’s where things become concerning: nearly all of the Mag-7 stocks have either entered a bear market (down 20% or more), or are on the verge of it” (three have climbed out of bear territory since last week, but only by a few percentage points): 

Given their outsized weight in the overall market – these seven tech giants make up 35% weighting in the S&P 500 – the losses in the Mag-7 cohort was the major contributor to the S&P 500 dropping more than 10% from February 19 to March 13. 

And that brings us to a key vulnerability facing the U.S. economy: the end of the record “wealth effect” created from the greatest bull market of the last 50 years, which removes the key pillar of strength holding up the U.S. economy – the boom in consumption by wealthy asset owners. 

That’s because all signs indicate that the same group of stocks that led the market higher over the past few years are now set to lead the market lower. 

The major factor behind the Mag-7 gains since 2023, which have driven the majority of overall gains in the S&P 500, has come from optimism over the artificial intelligence (“AI”) revolution. But so far, the only thing most of these companies have created from the AI revolution is investor optimism, which has resulted in higher share prices. 

So far, Nvidia is the only Mag-7 company seeing an uplift in revenue and profits from the AI revolution, as a seller of the “picks and shovels” of this boom: its AI-enabling graphics processing chips (“GPU”). But Nvidia’s gains have largely come at the expense of its largest customers, the four big tech firms: Amazon, Meta, Microsoft, and Alphabet.