Market Update: Magnificent Seven Lose Their Magnificence in July

Magnificent Seven come tumbling down

The Magnificent Seven stocks (Apple, Amazon, Google-parent Alphabet, Nvidia, Facebook-parent Meta Platforms, Microsoft, and Tesla) have been responsible for the lion’s share of the US bull market in equities since late 2022. So much so that a new term has made its way into market parlance: “bad breadth”. It refers to the fact that only a handful of stocks have contributed to the equity market’s rally, making the entire market vulnerable when sentiment towards them sours, as it has now.

During July, Nvidia, this year’s investment darling, came off about 17% from its peak. Disappointing results from Tesla and Alphabet added to a stark shift in sentiment, taking the rest of the market down with them.

The broad-based US stock market index, the S&P 500 Index, fell more than 1% in July and the tech-heavy Nasdaq was a significant 18.5% off its high on July 10, leaving the index more than 3% down for the month. South Africa’s All Share Index has also felt the impact of this switch in investor sentiment, coming off almost 1%.

Why has sentiment soured towards the tech giants?

Many analysts were already warning how expensive these stocks had become, and the latest earnings results of Tesla and Alphabet have been disappointing. The others are still to report theirs.

Will they come back into favour?

The jury is out on whether this will be a prolonged rotation out of tech shares and into small caps, which also typically offer great growth prospects, or whether it is a short-term technical correction. What we do know is that the Magnificent Seven will need to justify their ambitious growth strategies before investors pile in again.

The bottom line

The Magnificent Seven’s fall from grace in July is a keen reminder of two crucial investment truths.

Betting on one horse is a highly risky investment strategy. Investment wealth has historically been created and, crucially, maintained by investing in a diversified portfolio that includes exposure to the fast-running growth sectors as well as other assets that will also have their time in the sun.
Trying to time the market is ill-advised. Time and again, investors fall prey to buying into the latest investment darlings once they have already rallied significantly. Investing based on a share or sector’s long-term investment case is always a sounder strategy.

If you have any questions about how all of this affects your investment portfolio, please give Correlation Coaching a ring.

Jason Yutar: +27 83 415 9603 or
Zaheera Mohammed: +27 82 775 1898

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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