The Fantastic Four Beats the Magnificent Seven

What’s in a number?  College football fans know that the both the Big 10 and Big 12 Conferences each has 14 teams[i], so do we really need to be sticklers about whether the “Magnificent Seven” actually has seven components?  I’ll argue “no”, since the Mag 7 is at best an artificial construct anyway.

A normalized chart of the relative performance of the seven stocks versus both the Nasdaq 100 (NDX) and the UBS Magnificent 7 Index (a cap-weighted, seven stock index created in October 2023) shows quite disparate performances by the constituent members on a year-to-date and longer-term basis:

Year-to-date Normalized Chart, UBS Mag 7 Index (white), NDX (green), AAPL (blue), AMZN (red), GOOGL (lilac), META (yellow), MSFT (blue), NVDA (orange), TSLA (magenta)

Source: Bloomberg

There are some interesting takeaways from the chart above:

• For starters, it is interesting to note that the Mag 7 has roughly identical performance with NDX on a year-to-date basis.  Thus, it is not improper to use the Mag 7 as a proxy for the larger, actively traded index. 
• As with any index or average, some components outperform while others underperform.  In this case it’s an even split: three outperformers (NVDA, META, AMZN), three underperformers (GOOGL, AAPL, TSLA) and one average performer (MSFT). 
• The relative performances are similar when we graph them on a longer-term basis. Here is the same chart dated back to November 1, 2023, when the current upsurge began:

Normalized Chart Since November 1, 2023, UBS Mag 7 Index (white), NDX (green), AAPL (blue), AMZN (red), GOOGL (lilac), META (yellow), MSFT (blue), NVDA (orange), TSLA (magenta)

Source: Bloomberg

And here it is on a one-year basis:

1-Year Normalized Chart, UBS Mag 7 Index (white), NDX (green), AAPL (blue), AMZN (red), GOOGL (lilac), META (yellow), MSFT (blue), NVDA (orange), TSLA (magenta)

Source: Bloomberg

Shortly before Tesla (TSLA) released its last earnings report, we advocated for its removal from the Mag 7, to be replaced by Broadcom (AVGO).  Certainly that would have been an improvement, with AVGO rising as TSLA fell in the ensuing period:

Normalized Chart Since January 22nd, 2024, UBS Mag 7 Index (white), NDX (green), AAPL (blue), AMZN (red), GOOGL (lilac), META (yellow), MSFT (blue), NVDA (orange), TSLA (magenta)

Source: Bloomberg

That would have given us an extra outperformer and one less underperformer, but I doubt that would have moved the psychological needle.  The Mag 7 is as much about mindshare as it is about market capitalization.  Even though AVGO is larger and a recently a better performer than TSLA, only NVDA occupies a bigger mindshare among investors than the latter company.

That’s why I now assert that we should be shrinking the roster of the Mag 7 to either the Big 5[ii]  or the Fantastic Four.  So what if it narrows the market leadership?  No one seems to mind anyway.  Starting last spring, we asserted that “It’s Nvidia’s World, We’re Just Living (and Investing) in It”.  We can add to the supporting cast with three, six, or however many components we want, but as long as NVDA is leading the parade, the rest of the market is following along.

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[i] The Big 10 will be adding four more teams later this year, while the Big 12 adds another two.

[ii] A shout-out to Philadelphia-area basketball, even though that unofficial regional group now contains six teams.