The Magnificent Seven had an extraordinary year in 2023—one that will be very difficult to repeat. And there will be a new Magnificent Seven in 2024.
Alphabet,
Amazon.com,
Apple,
Meta Platforms,
Microsoft,
Nvidia,
and
Tesla
certainly earned the moniker last year. The seven largest stocks by market value in the
S&P 500
each returned 49% or more in 2023 and were responsible for the bulk of the index’s gains.
Similar returns in 2024 are unlikely. For one thing, this is the first time the seven largest stocks have posted such returns since at least 1999, suggesting a reversion to the mean may lie ahead. What’s more, just once in that time span have the same seven stocks remained the largest in the index over consecutive years. Something has got to give.
The Magnificent Seven doesn’t make much sense from a portfolio perspective either. They are highly concentrated in just three sectors—information technology, communications services, and consumer discretionary. No financials, energy stocks, or industrials cracked the top seven last year. There’s not much diversification there.
That’s why it’s time for a More Magnificent Seven, one not dependent on size alone. Our potential list carries over a majority of 2023’s Magnificent Seven—Alphabet, Amazon, Microsoft, and Nvidia—while Apple, Meta, and Tesla fall out.
Berkshire Hathaway,
UnitedHealth Group,
and
Visa
replace them. The new list keeps the megacap focus, but diversifies across more industries, adds more defensive exposure, and swaps out potential laggards.
Some choices were easy. Tesla has had a tumultuous two years, dropping 65% in 2022 before doubling in 2023. That recent rise hasn’t been driven by Tesla’s fundamentals, however. Earnings per share likely fell by around 25% in 2023, and they’re forecast to remain below 2022’s level this year. Even so, the stock trades for a pricey 62 times 2024 estimates. Tesla even lost the crown of the world’s largest EV maker to China’s
BYD
in 2023, despite several price cuts on its most popular models.
The decision to eliminate Apple wasn’t all that hard either. Though the company is popular with analysts, it has near-term issues of its own. Apple added $1 trillion in market cap in 2023 even as it has reported revenue declines from the prior year in four consecutive quarters. Growth in sales of the iPhone and Mac computers is essentially gone, and there’s little hope that the coming Apple Vision Pro mixed-reality headset will move the needle. Yet shares trade near a record high, at 28 times 2024 expected earnings.
Meta was more difficult. A big election year and artificial-intelligence enhancements to Meta’s advertising products may boost revenue growth in 2024, and the company has certainly made strides as it moves away from its disastrous metaverse pivot. But a second “year of efficiency,” like the one that lifted its stock by 194% in 2023, will be a tougher lift as analysts see cost increases returning. Even CEO Mark Zuckerberg has been selling Meta stock lately. Analysts are still bullish, but with targets just 5% above Meta’s current price, Alphabet seems like a better bet. Having both in the portfolio seems redundant anyway.
We considered both
JPMorgan Chase
and
Exxon Mobil
for our More Magnificent Seven. Both sport market capitalizations north of $375 billion and cheap price/earnings multiples around 11 times the consensus forecast for 2024. A slowing but still-growing economy this year should boost results at both, with ample free cash flow going toward buybacks. Exxon offers a dividend yield of 3.8% annually, while JPMorgan yields 2.5%. Ultimately, though, there are surer bets for 2024 that can better control their own fates.
Our More Magnificent Seven is still highly leveraged to fast-growing technology trends, but adds exposure to other areas of the economy and stock market. Last year’s performance will be hard to top, but a supportive economy and a broadening of the rally can help a group of the market’s largest companies deliver another winning year.
Microsoft: $2.79 trillion market cap
Microsoft is neck and neck with Apple in the race to be the largest U.S. company by market capitalization—and for good reason. While Apple struggles to grow, Microsoft is leveraging its lead in AI to boost its growth. Its Azure cloud-computing segment is set to grow again in 2024 and could even take market share, while its 365 Copilot generative-AI assistant could add $10 billion of annual subscription revenue in a couple of years, several analysts estimate. At 31.5 times 12-month forward earnings, Microsoft isn’t cheap, but if AI grows the way the Street expects it to, it may not matter.
Alphabet: $1.77 trillion
There are legitimate concerns about Alphabet, especially after last year’s big gain. No one knows how generative AI will impact Google search, and the company’s Bard chatbot is behind rival ChatGPT. But there’s far more to like about it. At 20 times 2024 earnings estimates, Alphabet, alongside Meta, is the cheapest of 2023’s Magnificent Seven. Heavy political advertising ahead of 2024 elections could boost search and YouTube, while Google Cloud growth is expected to reaccelerate. Alphabet still has plenty of cost-cutting to be done in its Other Bets segment, over $100 billion of net cash, and the capacity to buy back stock this year. We imagine it will figure out AI, too.
Amazon.com: $1.56 trillion
Amazon is among the most popular stocks on the sell side, with 98% of the 59 analysts who cover it assigning it a Buy or equivalent rating, according to FactSet. And why not? A still-strong consumer in 2024 will boost the e-commerce side of the business, while new cloud-based AI-as-a-service revenue will help performance at AWS, Amazon’s cloud business. Earnings per share are forecast to jump 36% and free cash flow to boom 66% in 2024. At 41 times expected earnings, Amazon stock isn’t inexpensive in absolute terms, but shares are the cheapest they have been in over a decade.
Nvidia: $1.31 trillion
Nvidia’s results speak for themselves: Revenue is on track to more than double in the current fiscal year, which ends in January, driven by demand far outstripping supply for its graphics processing units. Next fiscal year will be no slouch either, with analysts foreseeing 57% and 69% growth in revenue and earnings per share, respectively. Don’t overlook its software programming ecosystem, known as CUDA, which should help the company maintain its dominance. Yes, Nvidia has been the biggest beneficiary of the AI boom, but even after the stock’s massive rally, shares, at 26.8 times earnings, still look reasonably priced. Maintaining exposure to Nvidia seems like a no-brainer.
Berkshire Hathaway: $799 billion
Berkshire Hathaway is a market-cap giant, which makes it a good, diversifying addition to a More Magnificent Seven for 2024. The Warren Buffett–helmed conglomerate adds some industrial and utility exposure, along with its sprawling insurance operations. It keeps exposure to Apple, Berkshire’s largest equity holding, should the iPhone maker have a strong year after all. The bull case for 2024 is a continued insurance turnaround and growing operating earnings elsewhere in the portfolio. Some $150 billion in cash on Berkshire’s balance sheet gives Buffett ammo for a potential deal or share buybacks, with the stock appearing reasonably priced at 19 times earnings. It was last in the top seven in 2022.
Visa: $529 billion
Visa boasts a strong business with a wide competitive moat, economies of scale, and mammoth profit margins. The payment processor is forecast to grow like it always does in 2024 and beyond—on the order of 10% on the top line and 13% to 15% for earnings per share. More payment volume traveling across Visa’s network doesn’t cost any more to process—each marginal credit or debit card swipe is nearly all profit. Visa stock trades for less than 26 times its expected earnings for 2024, versus its average of 30 times over the past five years, and it adds both growth and defensive attributes to the More Magnificent Seven, helpful in a potentially choppier 2024.
UnitedHealth Group: $498 billion
No matter what the economy is doing, people still need to pay their insurance premiums, take their medications, and visit the doctor—defensive exposure that could be prudent in 2024. UnitedHealth, which was one of the S&P 500’s seven largest stocks in 2022, has industry-leading scale in commercial and Medicare Advantage plans, plus care delivery via OptumHealth and the OptumRx pharmacy-benefits manager. Analysts forecast slower medical cost growth in 2024 even after a jump in the last quarter of 2023, and management’s guidance implies 10% earnings-per-share growth this year. And after gaining less than 1% in 2023—and a post-earnings drop on Friday— the stock has some catching up to do.
Write to Nicholas Jasinski at [email protected]
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