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There is a widespread perception that the Magnificent Seven represent the greatest investment basket in history. Put equal money into all seven, hold forever, and you cannot lose. Lee and I both agreed that this narrative is starting to break down.
The data point that changed the discussion
Lee cited recent work from BTIG that caught his attention. As of mid-December, only Nvidia and Alphabet are beating the S&P 500 this year. The rest of the Magnificent Seven are trailing the benchmark. That surprised even seasoned investors. Amazon (NASDAQ: AMZN) | AMZN Price Prediction underperforming was not shocking, but Microsoft (NASDAQ: MSFT) lagging the index caught many people off guard given its solid earnings and strong AI narrative.
Meta Platforms (NASDAQ: META), Apple (NASDAQ: AAPL), and Tesla (NASDAQ: TSLA) have also struggled on a relative basis. Collectively, that means five of the seven stocks that carried the market for nearly three years are no longer doing the heavy lifting.
Leadership fatigue is a market signal
Lee and I have both seen this movie before. Every era has its dominant group, whether it was the Nifty Fifty in the 1960s, the dot-com leaders in 2000, or the financials and housing-related stocks before the global financial crisis. Leadership does not disappear forever, but it does rotate. What makes the current setup notable is how quickly that rotation is happening.
I said plainly that when leading stocks start to run out of gas, that is often how market tops are formed. You do not need the entire market to collapse. You just need fewer stocks pulling it higher. When five of the seven biggest drivers stall, the margin for error shrinks fast.
A strong market with hidden fragility
Lee pointed out that the S&P 500 itself has still had a very good year, up roughly 15% to 17%, and is on track for a third consecutive year of double-digit gains. That is rare. This has been one of the longest bull runs we have seen since the mid-1990s, rivaling the recovery periods after the dot-com bust and the financial crisis.
That strength is exactly why complacency becomes dangerous. Long bull markets convince investors that the ride will never end. History says otherwise.
The oldest rule still applies
Lee closed the thought perfectly, echoing one of the oldest adages on Wall Street. Nobody ever went broke taking a profit. Casinos are not built because the house loses. The long-term trend of the S&P 500 may be upward, but it is not a straight line. Knowing when leadership is narrowing can be the difference between protecting gains and giving them back.
Transcript:
[00:00:04] Doug McIntyre: Lee, there is a conception that the Magnificent seven are the, that is the best investment in the history of the world.
[00:00:11] Just take those, put your money into them. you’ll be good forever. Put an equal amount of money into each one you cannot lose. Guess what? How are they doing compared to the S&P 500 this year?
[00:00:27] Lee Jackson: Well, strangely enough, and, this caught my attention about three or four days ago, maybe a week, and it was an article from the good folks at BTIG, which is an outstanding firm on Wall Street that pointed out that only Nvidia and Google were beating the S&P 500 this year, the rest of the Magnificent seven, and you know who they are.
[00:00:53] Trailing the basic index for large cap stocks, which I was stunned by that, because I knew, that Amazon had underperformed, so I thought, well, that, that doesn’t surprise me, but I thought Microsoft would be ahead of it. ’cause they’ve had a solid year. No, just those two.
[00:01:13] Doug McIntyre: well, yeah, meta, listen, some of those stocks have really done very poorly.
[00:01:19] Lee Jackson: on a comparative basis. Yeah, so I mean, literally they led the market for almost three years. So it’s no surprise that they’re having a hard time at this juncture because most of ’em, for the most part, are overbought and they tend to correct extremely quickly. And only Nvidia and Google have had the huge stories behind them and, so much positive earningS&Positive forward expectations, right. That, yeah. So it, it’s interesting though, how a group, but it, listen, we’ve been around long enough to see, and I wasn’t really in the business in the sixties for the Nifty 50, but there’s always been a group of stocks, like we discussed recently, there’s only like two stocks that were the top stocks in 2000 in the S&P 500 that still are.
[00:02:08] So it just shows you, how things rotate. And one of those was Microsoft, but it shows you how things rotate and it’s only at like once in a generation. It’s not like once every a hundred years.
[00:02:19] Doug McIntyre: Well, I think if you want to call ato, if you say, when do you call a peak in a stock market. Okay. When do you think a stock market actually has hit a spot and the only direction is down?
[00:02:33] Take the stocks that are the leading stocks and when they start to run out of gas, and you’ve just described, you’ve got five of seven running outta gas, you’re really thinning out the stocks that have pulled the market higher. Absolutely. But when I start to see those guys get weak, I start to call a top.
[00:02:54] That’s when I start to see a top in the stock market. Yeah.
[00:02:57] Lee Jackson: and the S&P and the thing that’s, that, that’s interesting about that is now it’s not like the S&P hasn’t had a decent year. It’s up 15, 16, 17% in the ballpark. And we’re headed for the third full year of double digit. S&P 500, growth going up, over double digits for three years in a row.
[00:03:19] And this has been one of the longest bull markets we’ve had since I, I don’t know. I, guess you’d have to go back to the early aughts, when we rallied out of the, out of the dot com explosion or maybe the period after the real estate stuff from maybe 2010 to 15. But I haven’t seen anything like this since the mid nineties.
[00:03:40] Doug McIntyre: Well, let’s go back to something we said earlier, and it’s important if you own the S&P 500, if you’ve got a financial in, in instrument where you own it, we’re talking about taking half of your profits off the table, right? That isn’t just true of stocks, okay? Yeah. If you own S&P 500, if you own gold, whatever it is, don’t just stay there and assume that, well, this is gonna go up forever.
[00:04:06] It’s great. If you’ve made a lot of money on, being, there’s several ways to be in the S&P 500. I would, I’d sell some of that absolutely.
[00:04:18] Lee Jackson: After this year, after the run we’ve had these last three years. That’s what I mean. That’s always been, trust me, when I was a salesman, that was the, I, could easily get people to buy, but it was hard to get them to sell for just that reason.
[00:04:32] They thought, oh, it’s gonna go higher. And I said, well, look, that’s why I always had, look, let’s sell half. Let’s sell a third. Let’s at least put some in the bank. Because they don’t build those casinos ’cause the house loses and eventually this will come back down. The long term for the S&P 500 is a sweet 45 degree angle, but it has some big dips in it.
[00:04:52] And sometimes those dips take quite a while to come back. I mean, after 2000, after that blowup, it took years for the NASDAQ to come back. Oh my God. Like 10 years it took years. And after other sell offs, it’s taken years so it never hurts to take some money. And then you can reinvest that into something maybe a little safer or a stock that hasn’t run as much, or whatever the case might be.
[00:05:16] But I think you’re exactly right. It’s the old adage on Wall Street, this one, nobody ever went broke, taking a profit.
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