Investing

One Stock is Driving the Entire Magnificent 7’s Returns in 2024

Eric Bleeker

Published: June 1, 2024 8:02 am

The discussion focuses on the “Magnificent Seven” stocks—Microsoft (NASDAQ: MSFT), Apple (NASDAQ: AAPL), NVIDIA(NASDAQ: NVDA),  Alphabet (NASDAQ: GOOG),  Amazon (NASDAQ: AMZN),  Meta (NASDAQ: META), and Tesla (NASDAQ: TSLA)—that have driven the stock market’s returns. Notably, after years of the entire group outperforming, in 2024 a single member has been the primary driver of this group’s performance.

The One Stock Driving the Magnificent 7’s Returns in 2024

24/7 Wall Street Analysts Eric Bleeker and Austin Smith discuss how one stock is driving the Magnificent 7’s returns in 2024. We’ve included key points from their analysis below.

As of the May 29th close, the year-to-date returns of Magnificent 7 stocks are as follows:

• NVIDIA: 138%

• • Microsoft: 16%
  • Amazon: 21%
  • Apple: 3%
  • Alphabet: 27%
  • Meta: 37%
• Collectively the group returned 75% in 2023 
• And from 2019 to 2023 delivered a 271% return
• The S&P numbers in that time were 24% and 90%
• Simply put, the Magnificent 7 has been on an unprecedented winning streak that now has been running for more than five years with only a slight hiccup between late 2021 and the beginning of 2023.
• If you looked at the performance of technology stocks across the years as a comparison to the Magnificent 7 today, you’ll find there was more volatility in the past.
• For example, in 2010 technology stocks were the 9th best-performing market sector (out of 11). In 2011 they were the 8th, in 2012 they ranked 8th again, in 2013 they ranked 6th, and in 2014 and 2015th ranked 4th. That’s a lot of volatility despite very solid gains across that time.
• Entire sectors of the market rarely perform at an excellent level year after year. As another example, energy stocks were the absolute worst-performing sector for three years straight from 2018 to 2020 before being the best-performing sector in 2021 and 2022.
• The point: parts of the market that go on incredible runs rarely see the continued success the Magnificent 7 has.
• So, if we look at the Magnificent 7 in 2024, performance hasn’t been bad overall. It’s just slightly trailing indexes like the S&P 500 and Nasdaq.
• One thing to note is that it potentially makes a lot of sense that NVIDIA is leading right now while other stocks lag behind it.
• The reason is that NVIDIA’s biggest customers are the rest of the Magnificent 7! Microsoft, Amazon, Meta, and Alphabet have all been buying as many NVIDIA chips as they can get their hands on.
• Tesla has also made a massive investment in NVIDIA chips while Apple is about to push into AI in a much more intentional way.
• That is to say, NVIDIA’s massive profit margins are expenses from the rest of the Magnificent 7 in the near term.
• And the Magnificent 7 companies will continue buying NVIDIA chips, especially if they’re getting a positive ROI from areas like cloud computing.
• Yet, you could think of NVIDIA as a “leveraged play” on the rest of the Magnificent 7. Because they’re NVIDIA’s largest customers, if demand for AI is booming, the company will move in an extremely outsized way.
• On the counter side, if demand for AI is waning, NVIDIA will almost surely be the biggest loser among the group.

Transcript:

Eric, the Magnificent Seven. I mean, it’s been such a story over the last year and what an incredible and awe-inspiring story it is.

Seven stocks driving all of the returns for the index.

I’ve seen so many variations of the headline that, you know, without these seven stocks, the index is negative or flat.

But basically, the Magnificent Seven, Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta, and Tesla are driving all of the stock market’s returns.

But you actually did a little bit of analysis that shows that only one stock is driving the entire magnitude of the MAG7’s returns.

So tell me what’s going on here.

Yeah, as you mentioned, even if you’re an investor who’s just investing in indexes, you’re really thinking the Magnificent Seven because it is driving so much of the overall stock market’s performance.

Now, just to back up, when we’re talking about the Magnificent Seven, that’s Microsoft, Apple, NVIDIA, Alphabet, Meta, Amazon, and Tesla.

Austin, I want to put up a stock chart right now, which is going to demonstrate what’s going on this year.

And if you can’t read this because it’s blurry, what we have is the QQQ, which is a proxy for the NASDAQ up 12.4%.

We have the S&P 500 up 11.8%.

And here’s what’s interesting, though.

If you back out NVIDIA from the Magnificent 7, making it the much less inspiring Magnificent 6, that has performed at an 11.1% rate this year.

If you re-include NVIDIA and get back to the Magnificent 7, you are now looking at a return for this group of 28%.

So why is that?

Well, if we look at the returns for the year amongst this cohort of stocks, we have NVIDIA at 138%, Microsoft at 16%, Amazon at 21%, Apple at 3%, Alphabet at 27%, Meta at 37%, and Tesla at 29%, which you can see here.

Once again, you might need a magnifying glass to see this, but it is showing NVIDIA as the blue line really performing at a level that is far above the other stocks in this group.

Now, Eric, you know, I got to ask, right, like, what’s going on here and what’s behind this?

Because we all know the story of NVIDIA has been AI, but a lot of the other magnificent seven stocks have exposure to AI.

Google is making a billion dollars in investments in AI.

Now, their Gemini slash Bard rollout has been clumsy at best.

But we’ve seen Meta have very, very material net income growth through AI.

So we can’t just say, you know, this is AI alone.

There’s got to be something else that’s going on here.

Yeah.

Tell me, why is NVIDIA this balloon on this basket of really impressive companies, almost all of whom, in fact, all of whom who do have some sort of foot in the AI door?

Well, one area, Austin, is, you know, number one, this entire group, if you go back and you look at their performance from 2019 to 2023, it’s a 271% performance as a group.

So one of the things about investing is even for things that go up and to the right, it’s rarely as uniform as we’ve seen with technology.

Here, I want to bring up a chart right now.

This is S&P sector performance by different sectors.

And there’s a lot going on with this chart.

But what I want investors to focus in on is the orange on it, which is the information technology sector, and green, which is energy.

The point here is if you look from 2018 to 2020, that’s three years straight, energy is the worst performing sector.

And then 2021 and 2022, it’s the best.

In fact, if you look at this chart, it’s hard to find when there’s not a lot of just kind of noise of sectors rotating into best performance and sectors rotating out.

So what we’ve had is we’ve had a really kind of powerful run for technology stocks that’s been unprecedented as a sector.

And you’re asking about NVIDIA relative to other technology stocks.

One of the areas that’s interesting about this is the stocks that are NVIDIA’s biggest customers or the rest of the magnificent seven.

So if they are giving NVIDIA all of that earnings growth, it’s because they’re buying products from NVIDIA at more than a 50% margin to be able to fill their data centers, which is another way of saying that NVIDIA is collecting their high margin products from the other technology companies.

So in a weird way, NVIDIA has become a leverage play on the Magnificent Seven.

I think that’s part of what you’re seeing right now is that leverage on their performance.

For investors, that’s going to mean that for the foreseeable future in the near term, NVIDIA’s performance is going to be, I believe, dramatically higher to the upside or the downside relative to this group because, again, levered on top of it.

For right now, with NVIDIA, AI chips kind of continuing to sell at huge numbers and video looking like huge demand is built up for Blackwell.

That seems to be a continuing upward trajectory for the stock.

Eric, one of the things I really love about your point here that NVIDIA is sort of carrying the funds from all these other Magnificent Seven stocks.

Look at what a cash balance those companies have.

Apple has about $100 billion of cash.

I’m sorry, Google has about $100 billion of cash.

Apple has tens of billions of dollars of cash.

Meta, I believe, is about $30 or $40 right now.

And these are all companies that although Meta has announced a dividend, talk about the real return of capital.

The real return of capital is Meta taking all of that cash, pumping it into NVIDIA right alongside Google, right alongside Microsoft and all these other companies.

So rather than look for those companies to return cash for you directly, you can get all of these companies to return cash via NVIDIA.

It really is a call option on the core strategy of the other Magnificent Seven companies right now.

And it’s just acting like a magnet for those tens of billions of dollars of cash they have sitting on the books.

These are companies that don’t want to go to a 5% dividend yield.

They will do some buybacks, but these are not going to be companies that really return cash to shareholders directly in a huge double-digit sort of way.

So NVIDIA is the best way to play them spending that money instead.

Yeah, I think no question.