Magnificent Seven May Need a Roster Change

Who remembers FAANG?  For a few years it was the small group of stocks that led the market’s advance.  That nomenclature fell by the wayside when market leadership changed during the 2022 bear market and has since been replaced by the so-called “Magnificent Seven”.  Those stocks have indeed performed remarkably, but I believe that it is time for a change to the roster.  It’s time for Broadcom (AVGO) to substitute in for Tesla (TSLA).

To be fair, some of the stocks in the FAANG group are indeed part of the the Mag 7.  That is quite a testament to their ongoing relevance.  As a reminder, FAANG was an acronym for Facebook (now Meta Platforms, META), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google (actually Alphabet, GOOG, GOOGL).  The Mag 7 retains AAPL, AMZN, GOOGL and META, while replacing NFLX with Microsoft (MSFT) and TSLA. 

This is not the first time that we have advocated for a change to the market’s favorite acronym.  Just prior to the NASDAQ 100 Index’ (NDX) prior peak in November 2021, I proposed that FAANG should have been replaced with MANNA-ATM or GAMMA.  The former name added MSFT, Adobe (ADBE) and TSLA, while the latter simply replaced NFLX with MSFT.  Neither choice would have mattered much during 2022, but the GAMMA choice had five of the seven “magnificent” stocks and certainly did an adequate job at explaining what drove much of the upward moves in both 2021 and 2023-24.

Why then do I propose another revamping of the roster of market leaders?  Two reasons – size and performance.  Although neither the Mag 7 nor FAANG titles were based strictly on market capitalization – otherwise Berkshire Hathaway (BRK.B) would have made the list – it is certainly a contributing factor.  While huge, AVGO’s $572 billion is indeed smaller than TSLA’s $666 bn.  That gives AVGO a smaller weight in the S&P 500 (SPX).  But thanks to the recent re-weighting of NDX that de-emphasized the weights of its then-largest members, the recent stellar performance of AVGO now gives it a larger weight in NDX than either META or TSLA.  Considering how the leading performers in both indices have been Nasdaq-listed megacaps, it is not unfair to focus on NDX over the more broad-based SPX.

The performance-based argument for AVGO is quite revealing, though.  It has hardly been a secret that NVDA has been a key trigger for the equity market’s recent advance.  But did you realize that AVGO’s performance has recently kept pace with NVDA’s?  Indeed, since equities began their rocket-ship rally on November 1^st, through Friday, AVGO was up 44.6%, just below NVDA’s 45.9%.  Both are eye-watering changes, and well above NDX’s 20.2% move in that timeframe.  Heck, when we wrote last week that the broad markets were essentially following NVDA, we failed to recognize that AVGO was keeping pace.  So was AMD, by the way. Meanwhile, TSLA is up “only” 5.7%.  That is hardly a shabby return in just over 10 weeks, but it pales behind the other Mag 7 members, all of whom are up by double-digit percentages. 

Normalized Performance Since October 31^st, 2023: AAPL (white), AMZN (blue), GOOGL (red), META (purple), NVDA (aqua), TSLA (orange), AVGO (magenta), NDX (green)

Source: Bloomberg

Zooming in on the above graph’s legend, we see:

Perhaps it is hasty to suggest a substitution right now.  We will learn TSLA’s Q4 earnings after the close on Wednesday.  There is of course the possibility that they will be greeted positively – the recent underperformance implies that investor expectations for a post-earnings move are subdued – but each of the last three earnings reports were greeted with falls of just less than -10%.  If we see a 10% rally, like we did a year ago, then the performance gap could narrow significantly.  But if not, then this piece could be quite timely.  We’ll know more on Thursday, but I’ll go out on a limb and propose the roster move now.