Seven closely watched stocks — the Magnificent 7 — have generated outsized returns in recent years and are considered by many to be among the companies of the future. Will these companies still be dominant in 50 years?
Magnificent 7 Dominance: Seven technology companies — Microsoft Corp (NASDAQ:MSFT), NVIDIA Corp (NASDAQ:NVDA), Apple Inc (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOGL) (NASDAQ:GOOG), Amazon.com Inc (NASDAQ:AMZN), Meta Platforms Inc (NASDAQ:META) and Tesla Inc (NASDAQ:TSLA) — comprise over 30% of the S&P 500 index.
Their combined market capitalization of over $16 trillion is:
- Larger than the Chinese stock market ($10.6 trillion).
- Larger than the Japanese, Indian and British markets combined ($14.17 trillion).
- Four times larger than the Russell 2000 small-cap index (around $3 trillion).
These companies have not only seen high valuations, largely due to their exposure to artificial intelligence (AI), but rapidly growing earnings.
Largest Stocks in ’72: To examine the likelihood of future performance, it might be helpful to look at the past.
It is not unprecedented for a small amount of companies to comprise a large amount of the S&P 500. The so-called “Nifty Fifty” stocks of the early 1970s had similarly high valuations. The top 10 companies by market cap in 1972, before a recession in 1973, were as follows:
- International Business Machines (IBM)
- Eastman Kodak Co
- General Electric Co
- Sear Roebuck & Co. (Sears)
- Xerox Corp.
- Minnesota Mining & Manufacturing (3M)
- Proctor & Gamble Co
- Coca-Cola Co
- Avon Products Inc
- Johnson and Johnson
Many of these companies are shells of their former selves (Xerox, Kodak, Sears), no longer exist (smaller members of the 50), or simply belong to slower-growing industries. None of them are among the largest 10 companies today.
IBM, affectionately nicknamed “Big Blue,” makes a pertinent case study. Once the market’s technology darling, it failed to capitalize on the personal computing revolution relative to Apple and Microsoft. The company is still among the world’s largest companies but it has underperformed the market in the past 40 years.
The Future: Past performance does not indicate future performance and the likelihood of the Magnificent 7’s rally continuing in the short-term and long-term is a big question mark. The companies must have continued earnings growth to sustain their record valuations.
Big Tech has put itself in a position to succeed with ongoing strategic acquisitions and rapid technological innovation. However, new technologies — whether that be AI or something else entirely — have the potential to completely shake up the market in the future. The only certain fact of the future is that it is uncertain and companies must constantly adapt to meet the needs of the future.
Also Read:
- The Magnificent Seven: Here’s How You Can Profit From Their Dividend Programs
Photo: gguy via Shutterstock
