Transcript: The Five Minute Investor — Magnificent Seven

This is an audio transcript of The Five Minute Investor podcast episode: ‘Magnificent Seven’

Claer Barrett
Can you speak the language of money or are you one acronym short of an investment picnic? Too often financial jargon prevents us from making the most of our money. But this podcast from the Financial Times is designed to make you smarter and hopefully richer in just five minutes. Welcome to The Five-Minute Investor from Money Clinic. I’m Claer Barrett, the FT’s consumer editor, and I’ll be teaching you what you need to know about key investment terms in the time it takes to make a cup of coffee. Each week we take one investment term selected by our listeners and challenge a top investment commentator to defang the financial jargon in just five minutes. Joining me this week in the studio is markets columnist and fellow podcaster Katie Martin, who you may recognise as one of the hosts of Unhedged. Welcome, Katie.

Katie Martin
Nice to see you.

Claer Barrett
Now, the topic that I want to quiz you on today with no deviation, repetition or hesitation is the Magnificent Seven. Now, to start off with, could you give us your five-second definition?

Katie Martin
These are seven of the biggest stocks in the US that have been driving returns over the past year or so.

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Claer Barrett
OK. As I said at the timer, please tell us more about what is or who are the Magnificent Seven starting now.

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Katie Martin
So these seven stocks are Amazon, Apple, Microsoft, Alphabet, Tesla, Meta and — the Mcdaddy of them all — Nvidia.

Claer Barrett
Mm! And that makes seven. But what makes them so magnificent?

Katie Martin
So they just got to the point where they were growing so fast and particularly with the injection of AI, this artificial intelligence boom that massively supports stocks like Nvidia but also the others that I mentioned. They grew so large that they accounted for something like a quarter of the entire market capitalisation of the S&P 500. These are monster stocks. And so little moves higher or lower in any of them can have a really big impact on the index as a whole and on your portfolio and mine.

Claer Barrett
How did this term Magnificent Seven come about?

Katie Martin
Markets love a nickname. It’s kind of silly, but in this case, you know, the great brains out there noticed there were seven of them and they thought, huh, the Magnificent Seven. This is just like the famous western movie of the 1960s. Pedants will point out that, but of course, there was an original Japanese film, which is of course true, but nonetheless it’s the western that everyone thinks of. The really important thing to remember about the Magnificent Seven as David Kostin from Goldman Sachs has pointed out is that by the end of the film, four of the seven are dead.

Claer Barrett
(laughter) Well, I was going to ask, are these seven all equally magnificent?

Katie Martin
They are not equally magnificent. Nvidia is incredibly magnificent. That stock has been having an absolutely bombastic run. And the company’s got the earnings to prove that it’s worth it. So you know investors are paying a lot for these shares. But the earnings are there. The company is just a runaway success right now. Look at Tesla not having a great start to 2024. The stocks there are actually doing quite badly. So they’re not all created equal and there are actually some stocks now that have overtaken the likes of Tesla to become a bigger slice of the S&P 500. Nonetheless, this is a kind of grouping that have got this core characteristic of being very tech-heavy that means that they kind of cling together.

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Claer Barrett
Now, why do investors love the Magnificent Seven?

Katie Martin
They love them because of AI, because of artificial intelligence and because investors think not only is AI obviously a huge boost to the earnings of Nvidia and Microsoft and some of the others in that crowd, but also that they can use AI to become much more efficient and grab ever greater market shares of the markets that they’re in. So the big question is whether the rest of the market catches up to these stocks or whether they just keep going. We have this Magnificent Seven exceptionalism that is just pulling them away from the rest of the market right now. And they’ve turned out to be a great bet for anyone who had them on.

Claer Barrett
How likely are we to have them in our investment portfolios?

Katie Martin
You are very likely to have at least a slice of them in your portfolio. If you have any exposure to the S&P 500, then the S&P 500, the biggest index on the planet, is dominated by these names.

Claer Barrett
Even global indices.

Katie Martin
Even the global indices. Right. You look at something like MSCI World that skews very heavily to the US, which skews very heavily into these stocks that everyone owns a little bit of them.

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Claer Barrett
Why should investors also be wary of the Mag Seven?

Katie Martin
So the great thing about concentration risk, if it’s all going your way, is that you make a lot of money. But just imagine a scenario where something goes wrong with Nvidia. I mean, right now the market can’t see what that is, but if there’s something regulatory, something commercial, some sort of competition that comes out of the woodwork, then a big hit to any of these stocks could be meaningful for the overall index and for everybody’s investments. Like I say, Tesla’s come off quite hard so far in 2024. So it does cut both ways. And these sorts of levels of concentration do come and go. So it’s really worth keeping an eye on how they perform. But right now it’s all pulling in the right direction.

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Claer Barrett
How are the Magnificent Seven different from the Faang stocks that we used to talk about?

Katie Martin
Mostly because they’ve got a few names that have fallen in and a few names that have fallen out of favour. Like I say, like markets just loves sticking silly acronyms and names on to things as a way to help you understand them. But it’s, you know, they’re obviously extremely overlapping. At one point, the Faangs which, you know, Facebook was the F. It took on new members, it lost members. It’s a bit like the Sugababes, if you remember that band. But it now all about the Magnificent Seven.

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Claer Barrett
Well, the sound of that timer means, Katie, that your five minutes are up. Thank you for explaining the Magnificent Seven to our listeners with no deviation, repetition or hesitation. We firmly believe on Money Clinic that there are no stupid questions. The only stupid thing would be not to ask one if there’s something you don’t understand. So if there’s an investment term, a piece of jargon, the phrase you’ve heard that’s baffling you and you’d like me to unpack it in the studio with an expert, then get in touch with us. Our email address is money@ft.com. Or you can find me on Instagram and TikTok. I’m @ClaerB. Brand new Money Clinic episodes will be coming soon, and if you can’t wait until then, have a browse through our back catalogue where you can find hundreds of episodes. Or click on my suggestions in today’s show notes. Finally, The Five-Minute Investor is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that you’ll need to find an independent financial advisor. Tune in next week for another Five-Minute Investor. Goodbye.