The 7 financial virtues of the Magnificen Seven

  The magnificient seven drive the stock market performance of the world's leading indeces. seven stocks for seven extraordinary financial characteristics.

The year 2023 will have propelled the 'Magnificent Seven' to centre stage. This term refers to the film 'The Magnificent Seven' to mark the importance of seven US technology stocks: Apple, Alphabet (Google), Meta, Tesla, NVIDIA, Microsoft and Amazon.

These companies are taking on considerable importance in the financial environment because of their activities and the advent of information technology, particularly the increased use of artificial intelligence. They are all leaders in their field and have a global presence.

The number 7 is symbolic and has many meanings:

The Genesis cycle of creation;

The centre (the 6 directions and the central point);

The totality of the universe, combining 3 (the number for heaven) and 4 (the number for earth);

The 7 wonders of the world;

The 7 deadly sins;

The 7 theological and cardinal virtues;

The 7 seals and the 7 trumpets;

The 7 horsemen of the apocalypse;

The 7 metals in alchemy;

…

The 7 wonders of US technology bring us a new definition with 7 financial virtues or unusual financial characteristics.

1. Disproportionate financial results

The 2023 financial results of these companies were published at the start of the year, with figures that can sometimes be described as fantastic. NVIDIA, for example, the leader in chips for artificial intelligence, posted a net profit of 12 billion on sales of 22 billion! Meta, owner of WhatsApp, Facebook and Instagram, will be paying out a dividend for the first time in its history. The Magnificent Seven's profits are expected to grow by more than 18% by 2023. These are staggering figures.

2. high stock market performance

Such strong financial results have guided investors towards these seven companies, which are achieving excellent performances in 2023 and a very good start to 2024. NVIDIA and Meta are well ahead of the pack in this performance ranking, while the biggest names (Apple, Alphabet and Microsoft) bring up the rear.

2023 performance of the magnificent sevent

 2024 performance of the magnificent sevent

3. Stocks on the rise

A rare phenomenon, the rise in the indices is largely due to these few stocks. In 2023, 42% of the rise in the Nasdaq index of technology stocks was accounted for by just four companies: Nvidia, Meta, Microsoft and Amazon. In 2024, this concentration effect is even more exacerbated, with 92% of the Nasdaq's rise being accounted for by these same four companies.

Impact of the Magnificent Seven on Nasdaq market capitalization growth (USD billion)

Since 2020, the Magnificent Seven have been responsible for almost a third of the S&P500's rise.

Impact of the Magnificent Seven on S&P500 performance

While finance advocates diversification in terms of investment, the importance of these stocks in the rise of the indices is the exception that proves the rule. However, it is worth bearing in mind that the Nasdaq has outperformed broad indices such as the S&P500 since 2020. More yield, but also more underlying risk.

S&P500 vs Nasdaq

4. Considérable weight

Since most indices are calculated on the basis of market capitalisation, rises in these stocks lead to an increase in their weighting in the index. These seven stocks now account for 30% of the S&P500.

Magnificent Seven weighting in the S&P500

Their weighting increased significantly between 2012 and 2023, rising from 10% to 30%. The year 2022, when technology stocks performed very poorly, saw a temporary return to 20%. Deviating from these stocks in portfolio management therefore implies an active risk of performance deviation.

Magnificent Seven weighting in the S&P500

5. The weight of a purse

The market capitalisation of the Magnificent Seven alone would make it the 2nd largest stock market in the world. So they represent more than all Chinese stocks, or all European stocks put together.

Size of the Magnificent Seven / stock exchanges

6. The weight of a state

If we compare the annual revenues generated by these 7 companies with the GDP of each country, they would rank 12th in the world, between Brazil and Australia. Amazon alone represents the GDP of Belgium, the 25th largest country in the world in terms of GDP.

Size of the Magnificent Seven / GDP country

7. Enormous liquidity

Unlike many companies in a wide range of sectors, the Magnificent Seven benefit from gigantic amounts of cash. Microsoft and Alphabet each hold more than USD 100 billion in cash! In terms of the balance sheet, sometimes 35% of assets are in the form of cash. These considerable figures mean that these companies are relatively healthy, able to weather difficulties or recessions without a hitch and thus cushion any shocks.

Liquidity

No comparison with 2000

Unlike many companies in a wide range of sectors, the Magnificent Seven benefit from gigantic amounts of cash. Microsoft and Alphabet each hold more than USD 100 billion in cash! In terms of the balance sheet, sometimes 35% of assets are in the form of cash. These considerable figures mean that these companies are relatively healthy, able to weather difficulties or recessions without a hitch and thus cushion any shocks.

Comparison with the internet bubble

Comparison with the internet bubble

These are financially healthy companies, despite the rise in their share price.

Seven giantes

Over the years, the "marvellous seven" have become the "gigantic seven". Bigger and more powerful than governments, leaders in the technologies of the future, they are unquestionably worthy of inclusion in portfolios. In fact, their weighting in the indices makes them de facto favourites.

Despite this, we must not forget the basic principles of asset management: diversification, profit-taking and risk management. The slowdown in China, difficulties in sourcing raw materials or components, or geopolitics are all matters of concern for the development of these companies. As is the political management of companies that have become monopolies. So that the seven wonders do not become the seven horsemen of the apocalypse.