Investors should be wary of ‘Magnificent Seven’ stocks hype
Despite high-profile market commentators highlighting investor rewards for the so-called ‘Magnificent Seven’ stocks – which make up around 90% of gains on Wall Street’s S&P 500 in 2023 –they’re not a silver bullet for investors.
The stocks being promoted are Apple, Microsoft, Nvidia, Amazon, Meta, Tesla and Alphabet.
As I was quoted by Mena FN, Investor Ideas, Financial Express, Value Walk, Forkast News, and Tech Economy, amongst other media outlets, the noise is getting louder, and the frenzy surrounding these Magnificent Seven stocks is heightening. Yet this level of hype is dangerous as it could result in investors assuming these stocks are a silver bullet to build long-term wealth. And this isn’t the case.
Although I believe having exposure to these mega-cap tech stocks should be included in almost every portfolio – predominantly because they have strong fundamentals and are future-focused, particularly in AI – they shouldn’t be exclusive.
These stocks have surged due to the prospect of a less aggressive stance by the Federal Reserve. Yet it’s almost certain that the Fed hasn’t yet finalised its rate hiking cycle, especially considering last Friday’s strong jobs data. Even if the Fed pauses at this month’s meeting, further hikes are forecast before the cycle comes to an end. And this could potentially impact these powerhouse stocks.
Due to the backdrop of cooling but still, sticky inflation, as well as recession fears, sectors that perform well in a stagflationary environment should also be included in portfolios.
These include commodities, like oil, as their prices usually increase in response to inflation; consumer staples such as food and hygiene products, as demand will likely stay comparatively stable; healthcare, as it provides essential services that aren’t as affected by economic cycles; along with utilities, including electricity, gas, and water due to demand being fairly consistent.
As such, investors should always remain diversified across asset classes, sectors and regions to maximise returns per unit of risk incurred. Diversification is an investor’s best way to achieve success in the long term. This strategy reduces risk, smooths-out volatility makes the most of varying market conditions, maximises long-term returns and safeguards against sudden external events.
Of course, the Magnificent Seven are extremely important, but it must be remembered they’re not a panacea. Some investors could get stung unless some of the heat surrounding these stocks cools down.