Magnificent Seven Loses Importance as Soft Landing Means Risk On

The soft-landing scenario that investors see for next year points to further gains in US stocks. But it also dims the prospect of another stretch of wild outperformance for the technology giants that dominated in 2023.

One of the key themes behind the Magnificent Seven’s surge, which generated nearly two-thirds of the S&P 500 Index’s advance this year, appears to have faded in importance for investors: With recession fears swirling, the tech behemoths’ earnings growth, combined with robust cash flow and balance sheets, made them haven stocks.

With added fuel from the AI boom, the group rose almost 100% through mid-July, compared with roughly 20% for the S&P 500. But as confidence in the economy grew after the Federal Reserve’s July interest-rate hike, which investors now see as the last of this cycle, the tech titans’ gains became more muted. Since the end of July, the group is up almost 7%, while the broad market has risen around 4%.

Magnificent 7 rally colled in second half of 2023

There’s still a camp of economists predicting the Fed will trigger a recession as it battles inflation. But for now, investors are embracing the soft-landing view, broadening their horizons to smaller tech stocks and other sectors that had been beaten down for much of 2023.

“The only way they stay the Magnificent Seven is if we have less than a perfect landing,” said Rhys Williams, chief strategist at Spouting Rock Asset Management. “Still, from a portfolio-construction point of view, I think they’re good hedges, even if they pause for a while.”