Relentless Mag-7 Momentum: How Will This End?

Just recently, the entire large-cap stock market breathed a sigh of relief when NVIDIA posted 4Q2023 results that smashed Wall Street’s expectations. That’s all fine and well, but it speaks volumes that so much was riding on one company’s results in the first place.

At least in the early 1970s, it was the Nifty 50 instead of today’s Magnificent Seven. The Nifty Fifty crashed, and investors lost a lot of wealth, yet it seemed a little more reasonable for 50 stocks across a variety of market sectors to prop up the stock market.

Fast-forward half a century and we have not 50 but seven stocks holding up the market cap-weighted NASDAQ 100 and S&P 500. Plus, it’s really more like the Magnificent Six this year since Tesla is performing poorly.

Moreover, those stocks aren’t a diversified mix like the Nifty 50 were. They’re all technology stocks, so it’s more reminiscent of the Dotcom bubble, which also ended with a crash.

Since the NASDAQ 100 and S&P 500 are weighted by market cap, it’s possible for a small handful of stocks to be overrepresented and pull up entire indices. Consequently, the market can’t afford any disappointing earnings reports from NVIDIA, Alphabet, Microsoft, Meta Platforms, Amazon, or Apple.

Just remember that if you buy into these richly-valued market darlings at the wrong time, your portfolio could be underwater for years or decades. For a stark example of this, consider that investors who bought telecommunication stocks (AT&T, Verizon, T-Mobile, etc.) in the year 2000 are still struggling to break even and might only get there if they’ve consistently reinvested their dividends.

Additionally, one has to wonder whether it’s the smart money or the amateurs who are buying Mag-7 stocks at their current valuations. Corporate insiders, such as Meta Platforms CEO Mark Zuckerberg, are rapidly selling shares of their own companies. Amazon CEO Jeff Bezos just sold $6 billion worth of Amazon stock last week.

Is it possible that the smart money isn’t buying the dual narratives of “A.I. will save everything” and “the economy is headed for a soft landing?” Is it also possible that the Federal Reserve won’t cut interest rates half a dozen times and Big Tech companies aren’t meant to trade at 50x or 100x their forward earnings?

It’s definitely possible, and amateur investors will hopefully heed the warning of legendary Berkshire Hathaway CEO Warren Buffett. Berkshire’s been hoarding a lot of cash lately – a record $167.6 billion in 4Q2023, to be precise – as Buffett struggles to find large-cap companies trading at attractive valuations.

Buffett and Berkshire Hathaway recently released their annual shareholder letter. It stated, “There remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others… All in all, we have no possibility of eye-popping performance.”

Speaking of Warren Buffett, the indicator named after him – the Buffett Indicator – has been in bubble territory for a while now. When the combined market cap of all stocks divided by the gross domestic product (GDP) approaches 200%, we’re getting to the same conditions that preceded the fall of the Nifty 50 and the bursting of the Dotcom bubble.

This doesn’t mean that the NASDAQ 100 and S&P 500 will crash tomorrow or next week. The Buffett Indicator can stay elevated for a while before the other shoe drops.

That’s what’s dangerous about buying Mag-7 stocks at their current levels, though. You can compare it to picking up pennies in front of a steamroller, except you don’t know exactly when the steamroller will run you over.

For the time being, the Magnificent Seven (or Magnificent Six) will be praised in the financial media, and retail traders will flock to them. You can join them if you want, or you can take the side of Buffett, Bezos, Zuckerberg, and other billionaires who undoubtedly see the writing on the wall.