Last updated: August 19th, 2024
The Magnificent 7 (Mag7) is the moniker given to a collection of influential companies on the US stock market that includes Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
US stock markets have witnessed a series of all-time highs in recent years based on the rising share prices of these seven companies. The Mag7 collectively generated a 75.7% return in 2023 compared to a 24.2% increase across the leading market index, the S&P 500.
Given that kind of performance, if you’re looking to invest in stocks it may be tempting to hone in on the Mag7. However, as the common adage goes, past performance is not a reliable indicator of future results.
Important!
The group was heavily sold off at the start of August 2024 amid a global panic about US recession fears, scrutiny of AI spending, and the Bank of Japan raising its interest rates.
All but Meta lost value over the month and the S&P 500 index saw four straight weeks of decline. But does it signal a long-term pullback on these popular stocks?
Magnificent 7 Still Dominant, But Downside Risks Have Grown.
In 2023, the phrase ‘Magnificent 7’ was coined by Bank of America analyst Michael Hartnett, based on the dominance and extraordinary surge in the Mag7’s share prices.
That year saw gains of over 200% by Nvidia, over 190% by Meta, and over 100% by Tesla.
Market volatility in August saw a widespread sell-down of Mag7 stocks. Tesla’s share price fell over 21% over the month to August 15, Nvidia was down almost 10%, Alphabet and Amazon both fell over 12% and Microsoft dropped by over 8%.
Three key factors negatively impacted the group’s shares:
- Poor results and soaring AI spending revealed in recent earnings reports have turned investor sentiment. Nvidia’s reportedly delaying the release of its new GPUs, and Alphabet said its third quarter earnings could be affected by AI investments.
- The US Federal Reserve flagged at its August meeting, where it held rates, that a cut could come in September. Markets were initially buoyed, but then a surprise rise in unemployment to 4.3% reignited fears of an economic downturn.
- The Bank of Japan raised its interest rate and the yen’s value strengthened. Both of which prompted many traders to unwind carry trades based on borrowing cheap yen — meaning they sold their US stocks to avoid or cover losses. That triggered a broader global market panic and more selling of top US stocks.
Year-to-date in 2024, most Mag7 stocks are still delivering healthy share price gains, but Nvidia and Meta have led the pack.
In April 2024, Tesla’s market cap dropped below US$500 billion for the first time in nearly a year and its share price was down over 40% for the year. Tesla had seen a recovery mid-year and is now down almost 20% from the start of 2024.
Above: Growing divergence between gains made across the Magnificent 7. Zoom in to see performance across shorter timelines.
Investing in these stocks now means they’ll need to keep rising from their current value for you to make a profit.
You can learn more from our deep dives into Nvidia, Microsoft, Tesla and Apple.
Magnificent 7: Valuations Under Scrutiny.
Based purely on price-to-earnings ratios, the stocks appear overvalued.
Above: Average P/E ratio of the Mag7 combined is just under 30 while the average for the S&P 500 index minus Mag7 is less than 20. A lower P/E ratio is generally considered better.
But investors can, and do, ignore metrics when they believe in a company’s future potential.
Hype around artificial intelligence, driven by the emergence of AI-enabled applications and tools like ChatGPT, has captured investors’ imaginations.
Important!
It’s hard to say whether August’s correction in share prices indicates a longer-term disillusionment with Mag7 stocks.
Morgan Stanley analysts argue the group’s growth prospects indicate their current valuations offer an opportunity for buyers — provided the US economy sees a soft landing.
Morningstar’s Bryan Armour said investors might consider diversifying right now, to reduce their reliance on Mag7 and tap into other areas poised for a rebound. He said:
Ups and downs in Mag7 share prices can lead to major losses.
Did You Know?
In June 2024, Nvidia briefly surpassed Microsoft and Apple to be the world’s largest company by market capitalisation — with a valuation at US$3.3 trillion — before investor profit-taking erased over $500 billion of value a few days later.
It was the biggest three-day value loss for any company in history. Of course, Nvidia’s price did rebound, and it’s still dominating.
But the hype-driven rise, and falls, of the Magnificent 7 raises a number of concerns, including:
- Concentration risk for investors given that the Mag7 stocks make up about 31% of the S&P 500 index. If you’re heavily invested in Mag7 stocks, a sharp downturn in any of one of them—or the US economy more broadly—could devastate you financially.
- Potential to overpay for stocks expecting continual high growth resulting in capital losses if valuations drop or stabilise. The Mag7 stocks are expensive and you might not see much profit even if a serious correction doesn’t occur.
Long-Term AI Success Not Guaranteed.
Belief in the transformative power of AI-enabled apps and devices underpins a lot of the investor excitement around Magnificent 7 stocks — but the technology is still nascent.
Gartner’s hype cycle for AI in 2024 indicates generative AI has passed the so-called ‘Peak of inflated expectations’ — which naturally leads into ‘The trough of disillusionment’ when excitement wanes and early adopters report issues (hello, AI hallucinations) and low ROI.
Above: Investors can be blinded by hype surrounding emerging tech like generative AI.
Bloomberg reports this is a particular risk for Nvidia, whose chips are in demand by many of the other Mag7 members looking to exploit genAI for profits — but increasingly those products are leading to discontent among businesses, and planned spending on AI tools is declining.
However, Forrester analyst Alvin Nguyen told The Guardian that “only a collapse of the genAI market” would prevent Nvidia from reaching a US$4 trillion valuation in future, possibly by the end of 2025.
He did warn of several unknowns and factors outside Nvidia’s control such as:
- Disappointment with new AI apps, like GPT-5, due for release that underwhelms investors.
- Training model improvements that reduce computational needs and demand for Nvidia chips.
- Weaker than expected demand from enterprise and consumers for genAI products.
It’s unlikely that all companies riding the current AI wave will emerge victorious long-term.
A decade ago in 2014 there was no sign of Tesla, Amazon, Nvidia or Meta in the top ten companies globally — but the list did feature Exxon Mobil, Johnson & Johnson, and General Electric.
A report from consulting firm PwC that compared global market caps from 2014 to five years prior in 2009, found:
- Apple quadrupled its market cap in the preceding five years to become the world’s largest company, jumping from its #33 ranking in 2009.
- Thirty-two companies fell out of the top 100 companies by market cap within those five years, and no company maintained the same position in the top 100.
If we look at the top companies by market cap from two decades ago, in 2004, the top ten included Intel and Cisco Systems — two tech companies whose valuations rocketed upwards during the late 90s to the year 2000 in what is now known as the Dot-com bubble.
Did You Know?
After a frenzy of investment in internet companies, the dot-com bubble burst in March 2000 with many startups folding — causing the NASDAQ to fall 78% from its peak by late 2022.
Post-boom, Cisco Systems lost 80% of its stock value, while Intel’s shares dropped over 50%. While both are still large companies, they’re not ‘hot’ stocks.
Many analysts have warned that bullish investor behaviour in the Mag7 stocks is also a bubble that will burst.
Important!
Unlike during the dot-com boom, mega-cap US tech giants of today “generally have higher profit margins and returns on equity” than stocks in 2000, according to Goldman Sachs Research.
How to Buy Mag 7 Stocks In Australia.
You can use a full service stockbroking firm or an online stockbroking app to buy US technology stocks from Australia.
But first, be aware of the differences between becoming a shareholder in a US-based company compared to investing on the Australian Securities Exchange (ASX), such as:
- You’ll pay a conversion fee on your trades from Australian dollars to US dollars, so prioritise a platform with competitive currency conversion fees.
- Your buying power will vary based on the AUD/USD exchange rate at the time you invest, but a stronger US dollar can also mean healthier profits when you decide to sell.
- You’ll own shares via the US’ custodial model where you receive beneficial rights (e.g., you get all the returns) but a custodian holds the investments on your behalf.
- You’ll have extra tax liabilities, including a 15% US withholding tax on dividend earnings and Australian income tax on your returns (you may be able to claim a foreign income tax offset).
Important!
The custodial model is a legitimate approach that is the default in the US and generally safe. But many Aussie investors would be used to direct share ownership recognised by a holder identification number (HIN) recorded through the ASX’s CHESS system.
To buy Magnificent 7 stocks now, follow these steps:
1. Ensure Mag7 Stocks Match Your Investing Plan.
Buying any stock without an understanding of its purpose within your portfolio is unwise.
You need a plan for how you’ll deliver on your financial goals — which should be underpinned by clarity on your investing timeframe, your appetite for risk, and your ethical preferences.
Picking the best growth stocks or ‘the next big thing’ is also notoriously difficult. That’s why passive investing in broad-based index funds has seen such a strong rise in popularity among retail investors.
Did You Know?
At the start of 2024, passively managed funds in the US held more assets than actively managed funds for the first time.
With an index-based fund or ETF, you don’t need to pick winners—you gain from long-term rise in market values across a diversified basket of assets that are regularly rebalanced.
Speaking to a professional financial adviser can increase your confidence in making a decision about investing in Mag7 stocks or funds/ETFs that hold them.
2. Choose A Great Stockbroking Platform.
The platform you use does matter, as they vary significantly in terms of pricing models, available markets/products, usability and feature sets.
Some apps are clearly designed for experienced traders with robust in-built analytics and broad trading options — while others simplify stock investing at a low cost. To buy Mag7 stocks, you’ll need a share trading platform with access to the NASDAQ stock exchange.
We covered the pros and cons of 10 of the best share trading apps in Australia.
Look for ASIC-registered brokers to be safe. You can find the app’s Australian Financial Services (AFS) Licence number on their website, and verify it via ASIC Connect.
The process to sign-up for an account includes some additional KYC (Know Your Customer) details. You’ll be requested to share.
- Your name, personal contact details and date of birth.
- Your tax file number (TFN).
- A verifiable form of identification.
- Your bank account number for transferring funds in and out of your account.
- A completed W-8BEN form to reduce your US tax liability from 30% to 15%.
3. Add Money And Create An Order.
Once you’ve got an account set-up, purchase your stocks by taking these steps:
- Add funds into your account from a linked bank account or credit/debit card.
- Find the stock’s ticker symbol via the app’s search tool.
- Enter the number or value of shares you want to buy, assuming you’re happy with the share price listed.
- Set your order type. You can buy immediately with a market price, or wait till the price hits a certain predefined valued with a limit or stop-loss order.
- Make your purchase. It can take up to two days for the transaction to be settled.
Mag7: A Wise Investment Right Now?
Traditional valuation metrics haven’t meant much when it comes to how investors have approached Magnificent 7 stocks in recent years, but caution may be creeping in.
Some analysts warn the Mag7 stocks are due to drop in value, and others say we haven’t yet seen prices peak.
If you’re investing for long-term gains, say to fund retirement in 10-20 years—consider how confident you are that the Mag7 will still dominate by then and deliver a solid return?
Jody
Nelson says:
I attempted to use the “hack” to dodge conversion fees, but sadly after converting AUD to USD on a Wise account, there doesn’t seem to be a way to deposit that money into eToro; i.e. eToro recently disabled Wire transfers and Wise doesn’t support SWIFT transfers for sending USD to a bank in the US?
John Keys says:
CMC Invest are an abysmal in turning around new accounts.
Over 1 month to setup up an account with an investment trust, and still waiting. I was promised 5 business days.
Reg Watson says:
Given that China’s economy is going down the toilet how the heck do we expect an appreciation of the Aussie in 2024 ? We are tied to China.