By: Opulence Wealth Management
The so called ‘Magnificent 7’ is the latest grouping of tech and tech adjacent companies that have dominated the stock market in recent years. Its members include the following names in order of market cap: Apple, NVIDIA, Microsoft, Amazon, Alphabet (ne Google), Meta Platforms (ne Facebook), and Tesla. Together they make up a staggering +32% of the entire weighting of the headline benchmark S&P 500 Index. The question as to whether these are great companies largely speaks for itself; you don’t become a +$1T to +$3T market cap company by being a competitive slouch. But perceived corporate greatness does not necessarily imply future stock investment greatness.
“That was the greatest shot I’ve ever seen. -The worst, I was aiming at the horse.”
-Chico (Horst Buchholz) and Britt (James Coburn), The Magnificent Seven, 1960
Magnificence in context. The ‘Magnificent 7’ stocks have certainly dominated the financial news headlines in recent years, and with good reason. Consider that over the last two years, the Magnificent 7 stocks have generated a +129% return that has outperformed the S&P 500’s +54% return by two and a half times. Magnificent indeed!
But defining greatness is also time frame dependent. Let’s extend further back into history for those longer term focused investors in the reading audience. Instead of the last two years, let’s consider the time period of the last three and a half years dating back to late 2021. All of the sudden, magnificence turns to mediocrity, as only three of these much ballyhooed Magnificent 7 stocks – NVIDIA, Meta, and Apple – managed to even beat the S&P 500 over this longer term time period. As for the remaining four, they not only underperformed the S&P 500 over this time period, but they did so by double-digits. And one in particular in Tesla has actually generated a negative cumulative return over this time period to date. Not so ‘mag’ in this longer term view.
This highlights a key point associated with blue hot meme stocks at any given point in time throughout market history whether it is the Magnificent 7 today or the Nifty 50 stocks from half a century ago. Risk is a double edged sword. In order to generate the magnificent returns to land your company name in the latest group of hot stocks today comes with the trade off that you have the potential to generate equally wretched returns over some past or future time period. There is a reason after all that FAANG (Facebook, Apple, Amazon, Netflix, Google . . . note those stocks missing from this past group) became the Magnificent 7 became the Fab Four (Meta, Amazon, NVIDIA, Microsoft) reverted back the Magnificent 7. Blazing mega cap stock market leadership is a capricious game, even in the most supportive and liquidity fueled market environments like we’ve enjoyed in recent years.
“A fella I once knew in El Paso, one day he just took all his clothes off and jumped in a mess of cactus. I asked him the same question, Why? – And? – He said it seemed to be a good idea at the time.”
-Vin Tanner (Steve McQueen), The Magnificent Seven, 1960
Mag or drag? Before we go any further, what about the recent performance of these Magnificent 7 stocks in recent months. A must own as we continue through 2025, right? Not necessarily. Indeed, the returns performance of the Magnificent 7 stocks particularly during the period from October 2022 through June 2024 was absolutely an unequivocally off the charts fantastic. But given that most investor time horizons stretch beyond twenty months, we must remain nimble with our thinking and viewpoints even in the most disciplined asset allocation portfolios.
Consider 2025 year to date. Through February 20, the S&P 500 Index is higher by nearly +4% versus less than +1% for the Mag 7 stocks. Moreover, four of these names are trading negative year-to-date including Tesla that is down double-digits. So no FOMO if you own but haven’t necessarily backed up the BelAZ 75710 truck to these names your portfolio.
Let’s go back further to July 2024. Yes, these stocks have collectively outperformed the S&P 500 by a solid margin over this time period, but our Magnificent 7 references should be supplanted by the Highlander “there can be only one”, for without Tesla blasting the doors off in the five weeks immediately following the 2024 U.S. Presidential election (a discussion about managing non-market related idiosyncratic event risk in this specific instance could fill pages in an article on an entirely different news platform), the Mag 7 would also meaningfully underperform the S&P 500 over this time period, as the six other stocks in the group have trailed the broader market over this seven month time period (yes, NVIDIA, you have too by more than seven percentage points)(what was that Telsa? Yeah, as mentioned a few sentences ago, your still down -13% YTD).
“It shows you, sooner or later, you must answer for every good deed.”
-Calvera (Eli Wallach), The Magnificent Seven, 1960
The other side of the sword. With all of this being said, it’s still hard to imagine these gigantic tech stock leaders running afoul of investors and the markets. Indeed. But we must remember the old investment adage – a great company is not always a great stock. And as alluded to above, a stock that has the ability to rise so far above and beyond the market at any given point in time has the equivalent ability to fall below and beyond the market in another past or future point in time.
To illustrate this example, let’s take a closer look at the stock of NVIDIA. None of what will follow here is a recommendation to buy, sell, or hold the shares of this second largest company in the world by market cap that is a member of the Magnificent 7. That is for each individual investor to research and decide. Instead, it is simply being used for illustrative purposes only.
Let’s dive in by focusing on risk. NVIDIA stock has an annualized standard deviation of 61.07%. This is nearly four times the annualized standard deviation of the S&P 500 at 15.16%. What does this mean? Not to overly simplify, but NVIDIA’s stock price has, at any given point in time, experienced average price swings that have been four times that of the broader S&P 500 Index. Put simply, NVIDIA stock has a history of being very volatile in comparison to the broader market.
Now, when the broader stock market is rising, investors have been rewarded for this amplified risk. For example, during the period from March 6, 2009 when the market bottomed following the Great Financial Crisis to February 19, 2020 when the stock market peaked right before the outbreak of COVID, NVIDIA stock was cumulatively higher by +4,000% versus just +500% for the S&P 500. Undoubtedly magnificent. Samesies for the period from March 23, 2020 to November 21, 2021 during the fiscal and monetary policy liquidity deluged aftermath of the COVID crisis – NVIDIA up +540% versus the S&P 500 up +105%. When the winds of risk are at your back, the returns can be absolutely fabuolous.
Alas, it is important for investors to always remember that these risk winds can also blow fiercely in your face, and a stock with higher risk as measured by annualized standard deviation can disproportionately feel the effects. Consider the period of the Great Financial Crisis from July 19, 2007 to March 9, 2009. The S&P 500 was down -54% peak to trough, while NVIDIA shares were down as much as more than -80% over this same time period. Or more recently, consider the 2022 bear market from November 21, 2021 to October 14, 2022 driven by the sharp outbreak of inflation fueled by the aforementioned fiscal and monetary policy deluge. While the S&P 500 fell by -26% peak to trough over this episode, shares of NVIDIA cliff jumped by more than -65%.
But has NVIDIA been bulletproof in the age of AI since May 2023? Not so fast. Consider the Japanese yen carry trade unwind last summer. Whereas the broader S&P 500 dropped by less than -8% during this blip in the broader stock rally, NVIDIA shares fell by as much as -28% from July 11 to August 7, 2024. And memories are still farm fresh of the -22% decline in NVIDIA shares from January 23 to February 1 of this year, with -18 percentage points of this decline coming on one day alone on January 27. The S&P 500 fell by a cumulative less than -3% over this same time period.
Once again, none of this historical review is an endorsement or an indictment of NVIDIA shares. All of these previous declines were staggering, but they all proved to be great buying opportunities as the shares subsequently advanced to new great heights. Instead, it provides an important illustration for investors to persistently keep in mind that with extraordinary upside semivariance in any given stock or market segment comes with staggering downside semivariance at any given point in time. For those investors with the courage to weather the downside swings in stocks with such price volatility, the long-term rewards can be dramatic. But for some investors, the downside swings may be too much to bear at any given point in time.
“The graveyards are full of boys who were very young and very proud.”
-Chris Adams (Yul Brenner), The Magnificent Seven, 1960
Parting shot. Before drawing to a close, one final point is worth mentioning. And for illustration purposes only, we will build on our historical look at NVIDIA from above. NVIDIA is widely touted as the company that is the gateway to Artificial Intelligence. The simple notion – If you want to incorporate AI into your enterprise, you’ll need NVIDIA semiconductors for your computers to do it. And the revenue and profit growth that the company has produced through the year 2025 as a result has been astounding.
I recall a past time in history when another company occupied a similar exalted investment perch. In the late 1990s with the advent of the Internet, Cisco Systems was widely touted as the company that was the onramp to the Internet. The simple notion – if you wanted to get your company on the Internet, you needed Cisco’s routers and switches for your network infrastructure solutions to do it. And the revenue and profit growth that the company was producing through the year 2000 was astounding. But as the well documented story goes, the events that followed over the next few years from 2000 through early 2003 for Cisco and the many other of the best and most profitable tech highflyers of the day (including current Mag 7 member Microsoft in its initial heyday along with NVIDIA and Amazon in their infancy as well as slowly recovering Apple before the transformational introduction of the iPhone in 2007 – no publicly traded Facebook, Google, or Tesla just yet) not only took their stocks down from their previous peaks by as much as -80% or more, but it took years if not decades for them to return to their tech bubble peaks. Keeping with Cisco Systems, it took more than two decades until late 2021 before its shares finally climbed back to their 2000 highs for the first time, and it was still trading -20% below its 2000 peak as recently as last August before its recent surge to the upside.
All of this highlights an important point for investors to keep in the back of their minds going forward. Indeed, weathering the short-term volatility associated with these higher risk names has proven repeatedly rewarding for long-term investors. And it is very possible that such impressive rebounds will continue to prove just as much if not more rewarding to investors in the future. These are great companies with strong revenue and earnings growth, after all. With that said, historical precedent reminds us that events can unfold where these high risk stocks can smash up against the rocks and not rebound right away but instead spend years if not decades clawing their way back. This is a reality that all investors regardless of their risk appetite are well served to be mindful of going forward.
“The odds are too high. -Much too high. -Then we go? -No. We lower the odds”
-Chris Adams (Yul Brenner) and Harry Luck (Brad Dexter), The Magnificent Seven, 1960
Bottom line. The Magnificent 7 stocks have generated returns that have been highly rewarding for investors in recent years. But it is important to emphasize that these impressive results must be viewed in context and may not be as overwhelmingly impressive upon closer examination, particularly over longer term periods of time. Also, while they may continue to be among the best companies in the world for the foreseeable future, it does not necessarily mean they represent the best stock investment opportunities all along the way. History has shown that with higher risk comes the potential for higher reward but also much greater potential downside. Moreover, we have also seen instances of past giants that fell to the downside sword and spent long-term investment time horizons crawling their way back to previous peaks. So as we continue to pursue the abundant upside return potential of today’s investment market place, it is just as important if not more so to never lose sight of the commensurate downside risks.
I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice.
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