The Magnificent 7

The Magnificent 7

By the second half of 2024, The Magnificent 7, comprising tech stocks market cap accounted for more than a third of the S&P 500 total market capitalization.

In other words, just seven stocks, Apple, Microsoft, Amazon, Alphabet (Google), Tesla, Nvidia and Meta Platform, had a market capitalization of $16 trillion of the S&P 500 total $46 trillion market capitalization.

So, Magnificent 7 stocks are worth four times more than the entire market capitalization of the FTSE 100, which is the UK’s most valuable one hundred stocks.

If you took six of the largest stock exchanges in Europe and totalled all their market capitalization, the Magnificent 7 stocks would be worth more in 2024. 

A system that keeps producing winners, capable of reinventing the next generation of technology, disrupting itself, and creating future star performers is a good one to invest in. 

The Magnificent 7 rise of tech giants

Over the last decade, the market capitalization of the seven stocks, Alphabet (Google), Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla has grown by nearly 800%.

This compares to 150% for the broader benchmark.

But, as a subset of the magnificent seven stocks, the group’s largest gainers were Nvidia, Tesla, and Amazon. 

But if everyone invests their entire portfolio in just three spectacular winning stocks, that creates price bubbles and concentrated risks.  

What happens if the best of the Magnificent seven are disrupted by the next generation of winners?

Diversification protects a portfolio from investing in today’s winners that end up falling angel stocks.

Only a handful of companies win, and that handful changes constantly.

But when you can count the big players on just one hand making up the Magnificent 7, if one of those stars falls, then index investors are also at risk.

Put another way, diversification becomes challenging when the Magnificent 7 stocks make up more than a third of the market capitalization.

Investors seeking diversification may not realize the S&P 500 could be exposing them to concentrated risks. 

The Magnificent 7 & the S&P 500

The S&P 500 is the benchmark for US large-cap stocks, which includes just over 500 public companies traded on the stock exchange. 

Despite the S&P 500, consisting of 500 companies, these seven stocks have recently come to represent slightly more than one-third of the index, as already noted.  

In 2014, the market cap of these tech giants stood at just under 10%. By mid-2024, that figure was nearly 35%.

Concentration Risk of the Magnificent Seven

These seven top-performing stocks are also sector-concentrated in the tech industry.

So if the tech industry wobbles, the Magnificent Seven shakes, and S&P 500 index investors will feel the tremors. 

How can investors protect their stock portfolio from Magnificent Seven concentrated risks? 

Diversify the portfolio by investing in a broad large-cap index that excludes Magnificent Seven.

The XMAG is the first ETF offering exposure to the S&P 500, excluding the Magnificent 7, tech giants.