It is striking how few investors dare to bet their cards on the Magnificent Seven before 2024. All sorts of things are being tipped, but the Magnificent Seven have to suffer.
The hype is over and they could fall apart at any moment. It is either no good or it is no good. For an investor who dares to think contrair, it is an interesting premise. Here are the top 10 misconceptions surrounding the Magnificent Seven.
1. The Magnificent Seven are hype
These stocks are popular, but compared to past hypes, they cannot really be called a hype. A hype is a temporary phenomenon that receives excessive media attention, making it seem more important than it actually is. Such media attention was there last year, especially in response to OpenAI’s ChatGPT, but the phenomenon of artificial intelligence is not temporary and its effects are seriously underestimated for now. Moreover, appreciation for the Magnificent Seven is not yet half that of previous hypes, like dotcom stocks in the year 2000 or the Nifty Fifty in 1972. In that respect, there is still 100 per cent to go.
2. They have already risen sharply
It is true that shares in the Magnificent Seven have risen more than 100 per cent this year, but to a large extent that is a recovery on the 2022 share price fall. If you look from 1 January 2022, you will see that the Magnificent Seven has risen only about 10 per cent in two years. So the share price rise was mostly a spectacular recovery on the 2022 share price fall.
3. The Magnificent Seven are expensive
Profits have risen much more than share prices over the past two years. This year in particular, earnings growth has been remarkable. Nvidia still looked absurdly valued at 30 times revenue in April 2023, but after reporting second-quarter earnings, it was suddenly 30 times earnings. Never before had such a large company shown such spectacular earnings growth. The valuation for the Magnificent Seven is now at the very bottom of the range for the past five years. The correct thesis is that the Magnficent Seven is actually cheap in historical perspective.
4. Artificial intelligence is not the binding factor
The Magnificent Seven benefit from the trends in artificial intelligence because they have so much data. All that data is in the cloud these days and there is no diminishing returns on data. For artificial intelligence, more is always better. That means their market position has become stronger. The fact that Apple communicates less about artificial intelligence does not mean that it is not a core part of the company’s strategy. Apple will soon have the advantage that artificial intelligence can both run “on device” thanks to neural network technology on Apple’s own chips and use the iCloud, which offers more opportunities to learn from all the data. The essence in Tesla’s valuation is that artificial intelligence will allow cars to drive autonomously. With that, the most popular profession of men (driver) will disappear.
5. Artificial intelligence is not new
It is by no means new, but the attention to it is. The same media attention could have happened after Deep Blue won over Garry Kasparov or after the launch of AlphaGo Zero. It is only thanks to ChatGPT that people can much better imagine the possibilities of artificial intelligence. That will ensure that this topic is at the top of the agenda in many boardrooms, which will help accelerate it in the coming years. In essence, artificial intelligence is about the automation of human brainpower and is therefore bigger than the second industrial revolution, which was limited to the automation of human muscle power.
6. Artificial intelligence has insufficient impact on productivity
The speed at which artificial intelligence is being rolled out is spectacular compared to previous technologies. Artificial intelligence can potentially replace 60-70 per cent of human work. According to the latest estimates, half of human labour could be replaced by artificial intelligence between 2030 and 2060.
7. Further outperformance is unlikely
Shares of the Magnificent Seven have outperformed in nine of the past 10 years. Given the recent development and valuation, it is unlikely that these stocks will not outperform the broader stock market in 2024 as well. Moreover, all four requirements for true hype have been met, according to Kindleberger (Manias, Panics & Crashes). There is an economic paradigm shift, there is great promise in the distant future, the investment theme is broadening considerably and recently, thanks to the Fed, there is more visibility on liquidity.
8. Soft landing is a risk for the Magnificent Seven
A soft landing means that the economy is not growing as strongly as before. In such an environment, growth is quickly valued higher. Recall further that the previous soft landing (in 1995) was the oppurtunity for the fairy tale of Goldilocks. In the environment that was not too cold, but not too hot either, the dotcom rally went for broke. With the central bank now getting inflation under control, without recession, a soft landing emerges where higher growth is possible and where full control of inflation can provide the euphoria of an Uber-Goldilocks.
9. Sales and earnings growth slowing
A repeat of the 70 per cent growth rate in 2023 is unlikely, but even if it reaches half, growth is still spectacular. Many companies will start investing next year. This year, IT investment was disappointing due to post-Corona effects. The tight labour market and increased wages are an ideal environment for investing in automation using artificial intelligence. Moreover, six of the seven companies in the Magnificent Seven rely above average on their sales outside the US. This makes them much more resilient to a weak US dollar than many other US companies.
10. Magnificent Seven cannot beat the index in the long term
These stocks have been beating the index for a long time. Index investing may actually ensure that this outperformance can continue for some time. In the world index, the Magnificent Seven weigh in at more than 15 per cent, in the S&P 500 index even more than 25 per cent. This makes the Magnificent Seven the ultimate beneficiary of the move towards index investing.
Han Dieperink is chief investment strategist at Auréus Asset Management in the Netherlands. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co.