“The Magnificent Seven” now the “Gang of Four”
In 2023, the group of stocks known as the “Magnificent 7″—comprising Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—significantly influenced the S&P 500, driving its gains to 26% for the year. Excluding these seven, the average market performance was notably lower at 12%.
However, as we progress through 2024, the dominance of these seven stocks appears to be waning. The early part of the year has seen varying results from these companies. Notably, Tesla, Apple, and Alphabet have not maintained their previously stellar performance levels. This shift has led some market analysts to reclassify Amazon, Meta, Microsoft, and Nvidia as either the “Gang of Four” or “Fantastic Four,” distinguishing their continued strong performance from the other three.
Historically, over the decade leading up to 2024, both the Magnificent 7 and the newly termed Gang of Four have shown similar trajectories. Yet, the initial months of 2024 have marked a significant divergence in their collective performance, suggesting that the assumption of their consistent market support may need reassessment.
Tesla:
Several factors have influenced Tesla’s recent shift in market dynamics, the most prominent being heightened competition in the electric vehicle sector. This increased competition has suppressed consumer demand for Tesla’s vehicles, prompting the company to reduce prices and, consequently, profit margins. In response to these challenges, Tesla reduced its workforce by more than 10% in April 2024. As a result, its market capitalisation plummeted nearly 30% in the first quarter of 2024, from approximately $789.5 billion to $559.85 billion.
Apple:
Apple’s market situation has also deteriorated, with its company value decreasing by nearly 12%, from approximately $2.995 trillion to $2.648 trillion since the end of 2023. Despite Apple’s share price rising throughout 2023, the company repeatedly cut its quarterly estimates, hinting at an impending market correction. Although Apple surpassed Samsung as the leading global smartphone seller in 2023, it slipped to second place in 2024, primarily due to reduced demand in China. The company’s heavy reliance on iPhone sales, which account for over 50% of its revenue, has made it vulnerable to increased competition. Additionally, Apple faces significant legal scrutiny, including a U.S. Department of Justice investigation into potential antitrust violations and a €1.8 billion fine from the EU for anti-competitive practices in music streaming.
Alphabet:
Alphabet also experienced a downturn early in 2024, as its advertising revenue fell short of expectations. Management’s announcements of increased capital expenditures further dampened investor sentiment. Like Apple, Alphabet is under severe scrutiny for antitrust issues, with the Department of Justice launching major lawsuits against its online advertising division, Google. Notably, in a 2023 hearing, a Google lawyer reacted noticeably when it was revealed that Google had paid $26.3 billion in 2021 to secure its status as the default search engine on various devices, including $18 billion to Apple.
Gang of Four
Meanwhile, the “Gang of Four” (Amazon, Meta, Microsoft, and Nvidia) has continued to excel, leading many to anticipate reshaping the group that drove the S&P 500 to record highs in 2023. Nvidia, in particular, contributed significantly to the S&P 500’s growth in the first quarter of 2024, adding just over $1 trillion to its market cap, which accounted for about 25% of the total market cap gains of the S&P 500 during the period.
The graph below illustrates the divergence between the “Magnificent Seven” and the “Gang of Four” over the recent months:
Outlook:
In the second quarter of 2023, an analysis of S&P 500 companies showed that 177 firms mentioned “Artificial Intelligence” (AI) during their earnings calls—nearly triple the average of the previous five years. Companies incorporating AI discussions saw their stock prices rise by an average of 13%, compared to just a 1.5% increase for those that did not emphasise AI. This trend highlights the potential for growth in various sectors, which are still recovering from their lows in 2022, beyond the previously dominant “Magnificent 7.” While Wall Street remains a focal point, the stock market rally has expanded into the first quarter of 2024.
International markets, including Japan’s, have performed well or better than the U.S. market during this period. Market breadth was a major concern in 2023, when the majority of index gains seemed to be concentrated in a small group of large-cap growth stocks, especially the Magnificent Seven. However, market breadth has been steadily improving since late 2023.
Furthermore, with the expectation of Federal Reserve rate cuts, investors should consider moving away from money market funds. Those waiting for a definitive signal to enter the market, such as the start of a Fed rate-cutting cycle, risk missing significant gains. Historically, waiting for such a signal has resulted in missing an average of 11% in potential returns.
In conclusion, avoid getting swept up in short-term market Hype and ensure your capital is well diversified across multiple sectors and asset classes. This will ensure a long-term growth path that will outlast any short-term market fluctuations.
