Trees don’t grow to the sky.
It’s a translation of an old German expression that conveys the idea that there are natural limits to growth. And the bigger a thing grows, the slower its rate of growth will become.
Trees, of course, are the perfect example of this.
Though, stocks tend to act this way as well. Small cap stocks have historically outperformed large caps. This is because small companies have more room to grow and can generate rapid revenue and profit growth.
And stocks with very large capitalizations (in particular) start to decelerate as their valuations – the ratio of their price to their earnings – get stretched. This makes them more expensive compared to their peers.
We’re seeing exactly that right now with the famous “Magnificent Seven” stocks.
These are the seven tech behemoths that have garnered investor enthusiasm over the past eighteen months due to their association with artificial intelligence (AI) – and the potential it has to generate mega profits.
But many of these seven stocks seem to have entered a mini correction over the past few weeks (though some of them started correcting much earlier), suggesting that they’ll begin to rise more slowly. This can be expected – at least temporarily – until their earnings can catch up with their sky-high share prices.
King of Semiconductors
The reigning champion of the Magnificent Seven is AI chipmaker Nvidia (Nasdaq: NVDA) – its stock price rose from $11 in late 2022 to $136 in mid-June.
And it has since corrected sharply. The stock tumbled 12% over the past week, shedding a whopping $400 billion from its market capitalization. That course correction began right after the company became the most expensive stock in the S&P 500.
Here are the other six of the Magnificent Seven’s recent performances:
- Alphabet (Nasdaq: GOOG) peaked on May 21 and has been trading sideways since then.
- Apple (Nasdaq: AAPL) peaked on June 17 and is down 3%.
- Amazon (Nasdaq: AMZN) peaked on May 9 and is down 2%.
- Tesla (Nasdaq: TSLA) is having a tough 2024 – it’s down 26% for the year.
- Microsoft (Nasdaq: MSFT) has been trading sideways since June 17.
- Meta Platforms (Nasdaq: META) peaked in early April and is now 4% off its high.
And here’s an index of the seven stocks, the Roundhill Magnificent Seven ETF (Nasdaq: MAGS), and its performance year to date…
Changing of the Guard
I’m not suggesting these stocks are in a permanent decline. Far from it – they’re all well-run companies with valuable, proven business models.
And AI does seem to be the technology of the future – which is why I’m glad to have several of these stocks in my own portfolio.
But as their prices rise and their valuations stretch – Nvidia’s forward price-to-earnings ratio has grown from 25 late last year to 45 today – smart investors should be looking for newer companies to add to their portfolios for a new bout of rapid growth.
So, if you didn’t invest in the Magnificent Seven last year, don’t fret. There will be plenty of companies that benefit enormously from AI and other technologies going forward.
In fact, Alexander Green has discovered what he calls “the Next Magnificent Seven” – these are relatively-unknown AI super stocks that are set to dominate the markets going forward.
You can find all the details here.
But don’t wait. Make sure you own these stocks before they soar.
[Editor’s Note: Since Matt wrote this piece on Monday afternoon, the Magnificent Seven stocks have rallied a bit to take back recent losses. But the idea is the same: they’ve become extremely expensive relative to the broader market – and there are many other AI-related stocks that savvy investors should consider buying now while they’re still cheap.]