Rise and Fall of the Magnificent Seven

The hot Magnificent Seven group of stocks may be in a mini bubble, one that’s about to pop.

Opportunity Amidst Uncertainty

The silver lining is that, once they do, investors should probably scoop up the shares.

The Seven, which include Nvidia, Microsoft, Meta Platforms, Alphabet, Tesla, Apple and Amazon.com, have seen stock prices surge in the past few months. Some have more than doubled from their bear-market bottoms, with Nvidia up more than sixfold.

Driving Forces

The major driver has been new opportunities for artificial intelligence as the technology shifts from Google’s large language model “Gemini,” to new and advanced cloud-computing capabilities. Investors see more market opportunity for the technology behemoths. Analysts have increased their profit forecasts for the Seven companies, driving the stocks higher.

Signs of Trouble

Now, the group looks too hot—and evidence is building that the Seven is in a bubble that’s starting to burst.

The first piece of evidence is that the share-price gains are on par with those seen in other bubbles. The “FAANG stocks”—a predecessor group to the Seven—in aggregate, rocketed 229% by 2021 from their lows, before falling 49%, according to Bank of America. Before that, dot-com stocks soared 192% by 2000, and then plunged 73%.

The Ticking Clock

The next question is when these parties tend to end. Nine out of 14 bubbles that BofA studied burst after less than two years of declines. So far for the Seven, the run has lasted just over a year, so they could falter soon.

To that point, so much money has recently rushed into the seven stocks that not much more can move in. Just over a net $10 billion has flown into tech stock funds this so far year alone, putting the inflow on pace to hit $84 billion for the entire year. That would be a record, and about double last year’s $44 billion inflow.

As the market for tech stocks experiences a recent downturn, some analysts are cautioning against buying into the AI-hype rally, calling it a "baby bubble." With recent inflation results driving long-dated bond yields up, the future profits of tech companies are being reevaluated by investors. This has led to a retreat in tech stocks, such as Nvidia seeing a 7% decrease.

Strategy Amidst Uncertainty

While the current outlook might deter immediate investment, a potential strategy could involve waiting for a significant market drop before considering buying. This cautious approach acknowledges the current volatility but also seeks to capitalize on any future opportunities.

Long-Term Bull Case for Tech Stocks

Looking beyond the short-term fluctuations, there remains a compelling argument for the long-term growth potential of tech stocks, particularly those involved in AI innovation. Projections suggest that AI spending could nearly double annually through 2032, amounting to over $2.5 trillion by that year. This growth trajectory indicates promising earning potential for companies at the forefront of technological advancements.

A History of Innovation

Drawing parallels with past technological advancements like cellphones and the internet, which experienced sustained double-digit growth over a decade, there is optimism for the future of tech companies. As innovation matures and costs stabilize, profit margins are expected to improve, allowing for strategic actions like stock buybacks.

Investing in Future Success

With a historical precedent for exponential growth in technology sectors, investors are positioning themselves to leverage the inevitable second wave of success in technology adoption curves. Analysts like Adam Parker point to the potential for a correction followed by a robust bull run in the tech stock market.

In conclusion, while short-term uncertainties may impact the tech sector, a long-term perspective reveals a compelling case for sustained growth and profitability.