The remarkable rise of the “Magnificent Seven” stocks—Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—has driven substantial market gains this year. Tesla’s impressive nine-day rally has propelled all seven stocks to new highs, with an average gain of 45% this year and an 11% rise over the past 10 days. In comparison, the S&P 500 has only gained 2% during the same period. These seven stocks now account for about 34% of the S&P 500’s market value, the highest level in five years, and have collectively gained roughly 380% over that time, effectively doubling the market’s return.
The surge in these stocks is largely fueled by the growing enthusiasm for artificial intelligence (AI). Nvidia, in particular, has seen its market value soar past $3 trillion, increasing by approximately $2.1 trillion over the past year alone. AI’s transformative potential is being likened to the early days of the internet, with Wedbush analyst Dan Ives calling this moment the “1995 moment” for AI, suggesting it could usher in a new era of growth similar to the internet boom. Ives remains bullish on AI and rates Tesla, Microsoft, and Apple as “Buy,” while his colleagues at Wedbush give similar ratings to Nvidia, Meta, Alphabet, and Amazon.com.
However, the significant gains of the Magnificent Seven could also be their biggest challenge in the short term. The Roundhill Magnificent Seven ETF has hit new all-time highs for four consecutive days, and the relative strength of these stocks has reached a parabolic level. Market technician Frank Cappelleri of CappThesis notes that the relative strength of the Magnificent Seven is approaching 80, far above the average reading of 50 and indicating that these stocks are “overbought.”
This technical overbought status doesn’t necessarily mean that the stocks will decline, but it suggests that a period of consolidation or a pullback might be imminent. As earnings season approaches, the performance of these stocks will be closely scrutinized. Nvidia, a key player in the AI space, is set to report its quarterly results in late August, with Wall Street expecting earnings per share of 64 cents. Nvidia has a history of beating estimates by significant margins, but it will need to continue this trend to sustain its upward momentum.
Cappelleri suggests that even if these stocks are overbought, it doesn’t imply an immediate decline. However, he does anticipate some “backing and filling,” meaning a potential period of consolidation or minor pullbacks. Investors, particularly those heavily invested in the Magnificent Seven, might consider reassessing their positions. The impressive gains these stocks have delivered could tempt some investors to lock in profits or reduce exposure to manage risk.
Ultimately, while the AI-driven rally may continue, historical patterns suggest caution. The market has a tendency to correct overenthusiasm, and investors should be mindful of potential volatility. The upcoming earnings season will be a critical test for these stocks, determining whether they can maintain their impressive momentum or if a pause is in order.