Strategist Who Coined the Magnificent Seven Warns US Tech Is Set to Lag

In May 2023, Bank of America strategist Michael Hartnett coined the term "Magnificent Seven" to describe a group of seven tech giants that dominated the U.S. stock market. These companies—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—accounted for nearly all of the leading market index gains in early 2023 and were among the 10 largest American stocks by market cap. However, Hartnett also warned that these stocks might underperform in the future due to several factors.



Rising interest rates were one of Hartnett's primary concerns. He expected the federal funds interest rate to rise above 4% in 2023, which could negatively impact tech stocks, as they often have higher valuations and are more sensitive to interest rate changes. In reality, the rate did rise to 5.3% three months later, which could have contributed to the underperformance of some tech stocks.

Another factor was the market concentration of the Magnificent Seven stocks. These companies accounted for nearly all of the leading market index gains in early 2023, with nearly half of the S&P 500 stocks losing value that spring. This concentration of market gains in a small group of stocks can lead to a more volatile market and increased risk.

Hartnett also talked about a "baby bubble" around AI in 2023, suggesting that the AI boom might not be sustainable. However, the rapid growth and widespread adoption of AI in 2024 have proven this concern to be unfounded. AI technology and its development are likely to be the most important aspect of technological changes in enterprises worldwide, with AI startups fetching premiums in funding rounds.

Despite these concerns, the Magnificent Seven stocks have performed well overall. Nvidia, Meta, Tesla, Amazon, Alphabet, and Apple all outperformed the S&P 500 by a significant margin, with Nvidia being the biggest winner. However, Microsoft's share price saw a more modest 12-percent increase, as investors questioned whether and when Microsoft's huge investment in AI would pay off.



In conclusion, while Hartnett's warning about the potential risks associated with the Magnificent Seven stocks has been partially validated by market conditions and trends, the strong performance of these stocks suggests that investors may not be overly concerned about these risks at this time. However, it is essential to remain vigilant and monitor the situation, as market dynamics can change rapidly. Investors should consider diversifying their portfolios to mitigate potential risks and capitalize on opportunities in the tech sector.