Whether famous or infamous, the Magnificent 7 stocks have been 2023’s stock market story. They have dominated indices to the point that some Large Cap Growth Funds no longer qualify as diversified portfolios under the 1940-Act, and they have dominated market performance so much that markets have the narrowest leadership since the Technology Bubble (see Chart 1).
However, the fundamentals of the Magnificent 7 aren’t uniquely superior, and the breadth and depth of other growth opportunities seems historically large and attractive. We’ve described the attractiveness of the stocks outside the seven as a once-in-a-generation opportunity to invest in this broad and ignored group.
Narrow leadership is typically the result of deteriorating fundamentals in the broader market. When the profits cycle decelerates, investors gravitate to the fewer and fewer companies that can maintain growth during an increasingly adverse backdrop. Leadership narrows as fundamentals deteriorate, and growth becomes scarce.
With that in mind, the Magnificent 7’s significant outperformance might be justified if they were truly unique. Unfortunately, that is not the case. Rather, it increasingly seems investors’ enthusiasm for these seven stocks is a reflection of today’s speculative, momentum-driven market. But investors’ myopia has resulted in tremendous opportunities elsewhere.