The Magnificent Seven stocks have run into a brick wall in the second half of 2024.
After carrying the market in the first half of the year, and through much of 2023, the seven largest mega-cap tech stocks – Amazon (AMZN), Apple (AAPL), Google (GOOG), Meta (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA) – have all seen the air let out of their balloons in the last two and a half months, or longer in some cases.
On average, those seven stocks, which comprise roughly 30% of the S&P 500, are down 3.7% since the beginning of July. Not coincidentally, the S&P 500 as a whole is flat, after being up about 15% in the first six months of the year, during which every one of the Mag. 7 performed even better. For now, it seems, the Mag. 7 rally has fizzled.
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Eventually, the Magnificent Seven stocks will be back, though it’s doubtful they’ll be able to replicate their glorious runs from last November through this June.
The Phenomenal Performance of the Magnificent Seven Stocks
During that eight-month stretch, the seven mega-caps were up an average of 58% – and that includes a dud performance from TSLA, which actually declined 1.5% in that span. Artificial intelligence fervor, of course, had a lot to do with that run, at least in the cases of NVDA (+200%) and MSFT (+32%). Now that the AI hype cycle has cooled, and appears to be transitioning to a “reality phase” in which investors want to see evidence of a return on investment for all the dollars the big-tech companies have poured into AI, the Mag. 7, or at least Nvidia and Microsoft, no longer have a new, exciting catalyst.
All seven remain among the strongest growth companies in the world, and will likely make good, solid investments (to varying degrees) over the next three to five years, and beyond. But for this 23-month bull market to extend well into 2025, new leadership will have to emerge.
Seven stocks carrying an entire 500-stock index is all well and good when those seven stocks are up 58% in eight months. The next major upmove will require far more participation.
Who will step up to the plate?
New Leadership Needed
Utility stocks have quietly been the best-performing sector this year, up more than 21% on average. But utilities aren’t the type of stocks that get investors energized – and they haven’t been enough to slow the steady flow of cash into money market funds, which now hold a record $6.3 trillion. That’s cash on the sidelines just waiting to be deployed, and it’s been growing since the second quarter of 2022 (when it was a “mere” $5 trillion), essentially coinciding with the Fed’s interest rate hikes from near zero to a range of 5.25%-5.5% (see 10-year chart below, courtesy of the St. Louis Fed).
Board of Governors of the Federal Reserve System (US), Money Market Funds; Total Financial Assets, Level [MMMFFAQ027S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MMMFFAQ027S, September 12, 2024.
Now that the Fed is all but certain to start cutting rates next week, that in itself could act as a catalyst to lift all sectors – and pry some of that $6.3 trillion from the cold dead hands of those who have a large percentage of their cash tied up in money market funds. In a recent issue of my Cabot Value Investor newsletter, I made the case for homebuilder stocks to be among the first subsectors to get a bump once the Fed starts to slash.
In 2019, as the Fed was slashing short-term interest rates from 2.5% to 1.5%, homebuilder stocks, as measured by the iShares U.S. Home Construction ETF (ITB), were up 64%, more than doubling the 30% return in the S&P 500 during that span (it technically lasted from December 2018 to February 2020, just before Covid hit). But it will take more than just homebuilders getting going to reignite investor enthusiasm this time around and push the market well past its midsummer highs.
Until then, it remains the rare “stock picker’s bull market.” Yes, the bull market is now 23 months old and the S&P 500 has gained a handsome 51% since October 2022. But the rally has been far too top-heavy, and many people haven’t participated. Changing that narrative will require more than just the Magnificent Seven stocks, whose best run seems to be behind them.
I believe it will happen eventually, perhaps soon if the Fed really floors the gas on rate cuts. The question is … who will fill the Mag. 7 void? I think we will know the answer before 2024 comes to a close.
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