As investors strategically shape their investment strategies for 2024, a crucial question arises: Is it a good idea to invest in the Magnificent Seven of the US tech sector this year? This elite group of companies, featuring influential titans such as Microsoft, Nvidia, Tesla, Meta, Apple, Alphabet, and Amazon, has undeniably played a role in the recent market rally.
With the S&P 500 index surging by more than 20%, it’s interesting to note that the Magnificent Seven collectively accounts for over 27% of this American benchmark, positioning them among the top 10 components of the index by weight. Their influence extends to the Nasdaq 100, where their collective impact surpasses 43% of the index, contributing significantly to the financial instrument's impressive gain of over 46% during the same period.
A closer look at the individual performance of these stocks over the past year underscores their market dominance: Nvidia soared by an impressive 214%, Meta demonstrated a robust 171% increase, Tesla exhibited a noteworthy surge of 98%, Amazon showcased a solid 66% rise, Microsoft experienced growth of 61%, Apple demonstrated an increase of 39%, and Alphabet maintained a strong position with a growth of 54%.
However, one wonders if these mega-cap tech stocks will continue to be a lucrative investment in 2024. Will they continue to lead the financial markets? What are the advantages and risks associated with investing in these stocks? How to invest in these stocks? These are some of the questions we aim to explore in-depth in this article!
Pros and cons of investing in Magnificent Seven shares in 2024
These major US mega-cap companies known for their impressive annual performances have captured investors' attention towards the end of 2023, as they were anticipating the upcoming end of the monetary policy cycle and the potential substantial growth in artificial intelligence (AI).
These companies, positioned as leaders in the AI sector, especially with advancements in generative AI, are expected to innovate and capitalize on emerging markets, including trends linked to cloud computing and mixed reality, among various other use cases.
These tech giants not only exhibit accelerated sales, elevated margins, and heightened investments compared to their US or international counterparts, but also provide products and services deeply intertwined with our daily lives, which means that their uses are only going to keep increasing.
However, a contrasting perspective brings attention to escalating competition and heightened regulatory scrutiny.
The mounting regulatory pressure facing these American tech giants might indeed pose a potential risk to their growth in 2024 and the upcoming years. Regulatory scrutiny is intensifying around the world, with a growing emphasis on curbing market concentration and addressing perceived monopolistic practices by these industry giants.
Regulators across various jurisdictions are actively exploring ways to enhance oversight and rein in the influence of these tech behemoths with more competition and reduced monopolistic tendencies, potentially affecting their market dominance and growth momentum.
Many experts assert that the valuation of these companies is relatively high and somewhat stretched, making them expensive investments for many retail investors, particularly considering their combined market capitalization exceeded $11 trillion last year. This holds especially true if interest rates remain elevated and even increase this year, as these companies typically leverage borrowing to fund their growth.
Furthermore, some analysts anticipate 2024 to be a recovery year across various sectors, not solely for major American tech companies. This expectation may drive investors to diversify their investments into different sectors and explore opportunities in countries beyond the United States.
Deciding on the viability of investing in the Magnificent Seven for 2024 also requires an analysis and consideration of the economic and political landscape that could influence their performance over the course of this year. Therefore, evaluating the overall macroeconomic landscape is essential in determining whether to buy, hold, or sell shares in these companies.
Foreseeable risks, such as a potential slowdown in global growth and higher-than-expected inflation in 2024, pose a threat to the upside potential, as it could impact the trajectory of inflation and monetary policy in developed countries.
While the Federal Reserve expects three rate cuts in 2024, the European Central Bank and the Bank of England, for instance, have stated that they are far from finished in their efforts to bring inflation back to their 2% target. Interest rates could, therefore, remain high for an extended period or even increase if inflation heads upwards.
Despite expectations, both positive and negative surprises could still occur and influence the markets. If the Magnificent Seven stocks played a pivotal role in propelling Wall Street at the end of 2023, they might equally play a crucial role in market downturns should a pessimistic scenario unfold.
Several risks also loom over the equity market concerning geopolitical tensions arising from conflicts in Israel/Palestine, Ukraine/Russia, and in the Red Sea, coupled with upcoming elections in countries such as Taiwan and the United States, among others.
How to invest in the Magnificent Seven
For those considering an investment in the Magnificent Seven, one approach is to acquire shares of these companies through a standard, non-leveraged investment account and patiently await potential increases in their stock prices over time.
Additionally, certain regulated brokers, such as ActivTrades, provide the option to use leverage trading accounts. These accounts enable investors to use margin trading in order to capitalize on both upward and downward price movements of these individual stocks over the short-tem, through derivative products like Contracts for Difference (CFD).
Investing in the Magnificent Seven can also be done through an Exchange-Traded Fund (ETF), bundling all individual shares into a single financial product. Investors have the flexibility to easily buy or sell ETF shares, mirroring the process of trading individual stocks.
This method enables them to capitalize on an instrument offering exposure to all seven stocks simultaneously. For a more extensive exposure to the tech market, there are various tech ETFs available. These ETFs may encompass American, European, Chinese, or Japanese companies, or a blend of tech companies from diverse geographical origins.
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