While the Magnificent 7’s impressive performance creates a psychological pull to buy more of these stocks, this often means buying high and taking concentrated risk when valuations are stretched. Photo / Getty Images
While the Magnificent 7’s impressive performance creates a psychological pull to buy more of these stocks, this often means buying high and taking concentrated risk when valuations are stretched. Photo / Getty Images
Nick Stewart is a financial adviser and CEO at Stewart Group
Financial advisers are facing intense pressure from clients: should portfolios be loaded up on the Magnificent 7 stocks (Apple, Microsoft, Amazon, Alphabet, Meta, NVIDIA, and Tesla)?
These tech giants have delivered spectacular returns and now dominate America’s largest companies.Clients’ friends are bragging about gains, financial media breathlessly covers every earnings report and the fear of missing out is palpable.
But financial lessons tell us to look beyond the headlines and recent performance – and market history suggests this caution is warranted.
When we look at today’s market leaders, it’s easy to assume they will remain on top indefinitely. These companies have massive cash reserves, dominant market positions and appear to be shaping our technological future.
But consider this from Dimensional Fund Advisers: of the 10 largest US companies in 1980, only three made it to the top 10 by 2000. Even more striking, none of those 1980 giants appears in today’s top 10. Companies such as IBM, AT&T and Exxon – once considered titans – replaced entirely by a new generation of market leaders.
Research from the Centre for Research in Security Prices shows market leadership is far more transient than most investors realise. In 1980, six of the 10 largest companies were energy firms. Today, technology dominates.
This was a wholesale transformation driven by innovation and shifting economic fundamentals. It teaches us that today’s technology concentration may not last; seemingly unstoppable industries may face disruption from sources we cannot yet imagine.
Technological advancement doesn’t only benefit tech companies. Throughout history, firms across all industries have leveraged new technologies to innovate and grow. The internet didn’t just create wealth for actual internet companies, it transformed virtually every sector.
Similarly, McKinsey research suggests AI adoption could add trillions in value across all economic sectors, not just technology. A pharmaceutical company using AI for drug discovery or a manufacturer deploying advanced robotics may deliver returns that rival pure-play stocks.
The case for diversification
Markowitz’s Modern Portfolio Theory posits diversification as the only “free lunch” in investing – reducing risk without necessarily sacrificing returns.
Diversification doesn’t mean avoiding the Magnificent 7. These companies earn their market positions through genuine competitive advantages. However, it does mean resisting temptation to overweight them simply because they’ve performed well recently.
Many of today’s Magnificent 7 were small or didn’t exist 25 years ago. The next generation of market leaders is being built right now. A diversified portfolio allows participation in current market leaders while maintaining exposure to those that may emerge as tomorrow’s giants.
It’s important to recognise recency bias – this is the tendency to assume recent trends will continue indefinitely. Behavioural finance research shows this cognitive bias often leads to poor investment decisions. While the Magnificent 7’s impressive performance creates a psychological pull to buy more of these stocks, this often means buying high and taking concentrated risk when valuations are stretched.
When we look at today’s market leaders, it’s easy to assume they’ll remain on top indefinitely, says Nick Stewart.
Instead of chasing performance, stay focused on your long-term goals. Maintaining discipline around portfolio construction through regular rebalancing forces trimming in areas that have grown over-large, so you (or better, a qualified financial adviser) can redeploy capital to areas offering better prospective returns.
The path forward
Market history doesn’t repeat itself, but it rhymes. While predicting which companies will lead markets in 2040 or 2050 is impossible, leaders will certainly change over time as new technologies, business models and companies emerge.
A diversified portfolio positions you to benefit from these changes, rather than being hurt by them – to participate in today’s success stories while remaining open to tomorrow’s opportunities.
The Magnificent 7 have earned their place among America’s largest companies. But despite how tempting they are, the logical course of action isn’t to chase yesterday’s winners or follow the herd – it’s to build resilient portfolios that serve your unique needs.
Building a plan that can weather change (while capturing opportunity wherever it emerges) requires diversification, discipline and a healthy respect for the lessons of market history.
If that sounds daunting, try arranging a chat with your local, fiduciary financial adviser to discuss what your next steps might be – it’s a better use of your time than tracking Magnificent 7 performance, anyway.
