Magnificent 7 stocks aren't setting the market up for another tech bubble

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In today’s big story, we’re looking at why the Magnificent 7’s domination of the stock market might not be such a bad thing.

What's on deck:

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The big story

The S&P 500 7

An illustration picture taken in London on December 18, 2020 shows the logos of Google, Apple, Facebook, Amazon and Microsoft displayed on a mobile phone with an EU flag displayed in the background.
Google, Apple, Facebook, Amazon, and Microsoft logos displayed in front of an EU flag.JUSTIN TALLIS/AFP via Getty Images

The stock market is looking a lot less like a "market" these days.

The Magnificent 7 stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — account for roughly 29% of the S&P 500 these days, according to data from Goldman Sachs.

Such a top-heavy market creates unique occurrences. The S&P 500 closed at a record high earlier this month despite more than twice as many stocks being down compared to those that were up.

The high market concentration has some concerned we could be on the cusp of disaster.

But for others, like BMO’s chief investment strategist Brian Belski, the risk is overstated, writes Business Insider’s Matthew Fox. The market has actually done well the year after the biggest stocks in the S&P 500 outperformed the index, posting an average return of 14.3%.

The index did drop after the tech bubble burst in 2000. But comparisons between the dot-com era and the current market are misguided, writes BI’s Aruni Soni.

The late ‘90s were full of companies charging into the public markets with more promise and potential than product and profit. This time around, what’s driving the market is highly profitable companies with much stronger fundamentals.

BMO note

The question of where that Magnificant 7 money goes remains to be seen.

David Sekera, a senior US market strategist for Morningstar, told me he thinks it’s a good time for investors of those stocks to lock in some profits and reinvest in companies that lagged last year’s rally.

The research firm’s five-star rating system for stocks is less bullish on the Magnificent 7 these days, after viewing almost all of them as undervalued to start 2023.

Microsoft, Amazon, and Tesla have three stars, indicating a fair market value, while Apple, Nvidia, and Meta have two stars, indicating they are overvalued. Alphabet, with a four-star rating, is the only one among the group considered undervalued.

Small-cap stocks, which some investors have speculated could have a big year, are a potential landing spot for money rotating out of the Magnificent 7, Sekera told me. But some investors might want to keep their money in large-cap stocks.

If that’s the case, blue-chip stocks like Exxon Mobil, Pepsi, and McDonald’s, all of which are rated four stars, could see interest, Sekera told me.

Still, money moving out of the Magnificent 7 and into other stocks is not guaranteed to be a smooth transition. Geopolitical risks, uncertainty around the next interest rate cuts, and a looming US presidential election pose additional unknown risks.

Your Monday headline catchup

A quick recap of the top news from over the weekend:

3 things in markets

BlackRock executive Charles Hatami, BlackRock CEO Larry Fink, and former BlackRock executive Craig Phillips on top of a BlackRock logo pattern and a black background
Charles Hatami, head of BlackRock's Financial Markets Advisory business, BlackRock Chief Executive Larry Fink, and former BlackRock FMA executive Craig Phillips.BlackRock; Johnny Nunez/WireImage/Getty; Ludovic Marin/AFP/Getty; Samantha Lee/Insider

1. BlackRock switched things up at its secretive unit that advises governments. The world’s largest money manager promoted two executives who ran Financial Markets Advisory. The unit, which serves as a consulting arm for BlackRock, has been an internal launching pad for leaders.

2. The commercial real estate crisis could force the Fed’s hand. Economist Komal Sri-Kumar said ongoing issues in the sector might require the Fed to lower rates by May. Sri-Kumar cited the 2008 financial crisis as a lesson in why the central bank shouldn’t wait too long.

3. Four top investors and economists aren't feeling great about the market. Jeremy Grantham, David Rosenberg, Jeffrey Gundlach, and Gary Shilling have all voiced concerns about the US still slipping into a recession. Here’s what has got them so worried, from overpriced stocks to the government’s aggressive spending.

3 things in tech

Photo Collage featuring One Medical Office Building, Amazon Logo, pills and money
Amazon; Justin Sullivan/Getty Images; Alyssa Powell/BI

1. The secretive, painful reset of Amazon’s big healthcare bet. The tech giant paid $3.9 billion for One Medical as part of a push into healthcare. But with hundreds of millions in losses and questions about strategic direction, Amazon embarked on a secret initiative to get back on track.

2. Hollywood’s real competition is YouTube, not Netflix. For all the praise Netflix has gotten for winning the streaming wars, YouTube is still tops for view time and advertising. It’s also winning in areas that matter to Gen Z.

3. SoftBank’s Masayoshi Son is all in on AI. SoftBank realized a $72 billion gain on its investment in Alibaba over two-plus decades. But after essentially exiting its position completely, the firm is turning to AI, albeit with mixed results.

3 things in business

Illustration of employees frustrated.
Kiersten Essenpreis for BI

1. Gen Zers aren’t the only ones fed up with their employers. It turns out that Gen X and Boomers aren’t as loyal to their workplace as senior correspondent Aki Ito previously thought. After all, they actually remember when their companies used to treat them well.

2. Welcome back, Jon Stewart. His highly anticipated return to “The Daily Show” happens tonight, but a lot has changed in the TV landscape since he’s been gone. The people still tuning into their televisions are a much older and smaller group.

3. Secretly working two jobs is risky, but it might be worth it. Job security was a major reason one millennial took a second remote gig on the sly — now he’s making $250,000 a year. He shared some advice for overemployed workers trying to pull it off.

In other news

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The Insider Today team

Dan DeFrancesco, deputy editor and anchor, in New York. Hallam Bullock, editor, in London. Jordan Parker Erb, editor, in New York.

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