Publication date: December 19, 2024
You may have heard of the "Magnificent Seven" in the past year. It refers to the seven largest technology companies in the US: Apple, Microsoft, Alphabet (Google), Amazon, Meta (Facebook), Tesla, and Nvidia.
These companies have had a huge impact on U.S. stock markets and have shown fantastic performance in 2024. At the time of writing, the ETF (mutual fund tracking the above seven stocks) will yield more than 70% in 2024.
Time for a closer look and most importantly; what can we expect and what are the opportunities in the coming year?
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Influence on U.S. stock markets
The Nasdaq-100 technology index is a market capitalization-weighted index. This means that companies with higher market capitalization have greater weight in the index. The Magnificent Seven are among the largest companies in the world and account for a very large percentage of the Nasdaq-100. Together, they represent over 50% of the total index value. The other 93 Nasdaq participants thus represent less than 50%.
In addition to the Nasdaq-100, the Magnificent Seven plays a significant role within the broad U.S. stock index S&P500. With about 30% of the total value, it is pretty clear that these seven Technology companies call the shots.
Their huge market capitalization and dominance in growth sectors make them determinants of the index's success. Investors in the Nasdaq-100 in particular should therefore be aware of the performance and prospects of these seven companies, as they exert a disproportionate influence on the index.
What is the current situation regarding the Magnificent Seven?
To get a nice overview, below is the graph for the past year. The purple line indicates the movement of the Nasdaq.
The year begins with Nvidia's huge increase due to developments in AI. Big increases will always go through a sharp correction as well. This can be seen in the summer period. The Mag7 loses about 25% in a month there. The Nasdaq is known for higher volatility but lost "only" 15% in that month. In September, the Fed's interest rate policy gives the technology sector in particular the wind in its sails.
Then Mr.Trump wins the Presidential election and Tesla in particular benefits with a rise of almost 50% in a month!
Wednesday evening, December 18, the FED announced that we should expect fewer interest rate cuts in 2025. This caused the Mag7 to drop about 5% in a few hours.
From the chart and accompanying commentary, it is clear that the Magnificent Seven (Mag7) has a very high potential but the investor must be able to take a bump. The Nasdaq looks relatively quiet compared to the Mag7. Moreover, it must be said that the Mag7 did have a huge tailwind in the past year. The AI hype, interest rate cuts, and Mr. Trump have played right into the hands of these technology giants.
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What is the expectation for the Magnificent Seven in 2025
Overall, analysts acknowledge the strong performance and potential of the "Magnificent Seven," but also point out the high valuations and potential risks. Growth expectations are generally based primarily on AI growth.
Our expectation is for a correction in the coming months and sharply higher share prices for the long term. This is based on the fact that Mag7 was able to benefit from full wind in its sails last year. Expectations are tremendously high which raises the possibility of a slight disappointment. We already saw this on Wednesday night when the Fed came out with its interest rate policy. Tesla dropped about 10% in a few hours. After a rise of tens of percent, this is only a modest correction.
For the continuation of the upward trend, one must be alert to whether Donald Trump can indeed weaken his promises and start fully implementing his America First policy. In addition, the US economy is growing excellently and inflation and employment remain around target. Reason for the Fed to pause interest rate cuts for a while and most likely reduce them in the coming year.
The bar of expectations is sky-high and the stock price has skyrocketed. The possibility of an intermediate correction is therefore high.
For the long term, expectations are excellent. They are the leading companies in the industry of the future and developments are happening at lightning speed.
Timing is very important now.
Below is the most likely scenario from our algorithm. First half of 2025 the Mag7 may correct about 15% to rise about 40% from there to the late 2025 price target at $70.
Conclusion
The Magnificent Seven can be tracked through an ETF. You then invest in the seven companies that call the shots in U.S. markets. These superstars are under enormous pressure as expectations are very high. After a fantastic year with a 70% rise, there are some challenges ahead. The Fed has made the first move and it remains to be seen whether Donald Trump can start implementing his America First policy immediately without obstacles. Developments in AI are moving forward, though.
If you can take a beating then Mag7 participants are expected to be a very valuable part of the portfolio. For the first half of 2025, we expect a difficult phase so the conclusion is that you should definitely follow Mag7. But be careful about getting in because technically Mag7 could go back about 15%. Getting in at that point can be very profitable for the short term and long term.
Disclaimer: Investing involves risk. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. They are therefore for educational purposes only.