Market Drivers in 2024: The Magnificent Seven? Something Else?

Art by Alex Eben Meyer

Like the gunslingers in the 1960 classic Western film, “The Magnificent Seven,” the seven mega-cap stocks that dominate the equities market are powerful. The question for investors is: Will the Magnificent Seven stocks continue to be the market’s drivers? Or will other stocks supplement or even supplant them (in the movie, only three of the heroic gunmen survived). Or will everything fall?

An important backdrop is that right now, the conventional wisdom on the economy is for a soft landing, with sustained growth maintained and inflation ebbing. That scenario would seem to support the Seven’s retaining their lofty perches in 2024. They comprise almost one-third of the S&P 500’s market value.

After a lousy 2022, with its incongruous double-drop of both stocks and bonds, both asset classes finished 2023 in good shape, with the S&P 500 up 24.2% and the Bloomberg US Agg bond index ahead 5.3%. Absent a recession, which in early 2023 many strategists predicted and got wrong—calling it a certainty before the year was out—Wall Street’s S&P 500 outlook is for a more muted, single-digit 2024.

A Bloomberg survey of more than 500 strategists put the S&P 500 at 4,750 as of year-end 2024, which would mean a flat market advance. Of the five biggest Wall Street firms, the projections for next year range from a 6.6% increase for the S&P 500 (Citigroup and Goldman Sachs) to a 5.5% drop (J.P. Morgan). None of these projections is anywhere near a 20% rise or a 20% fall that indicate a bull or bear market.

Other predictions bode well for equities, which tend to suffer with high and rising inflation and interest rates. For the new year, the top-firm strategists also foresee lower inflation and short-term interest rates, with the yield on the benchmark 10-year Treasury, now 3.9%, climbing as much as 1.5 percentage points. If so, the spread between long- and short-term Treasurys would end the inverted yield curve, removing a harbinger of a recession—economic slumps are kryptonite for stocks.

To view Wall Street’s 2024 U.S. forecasts, click here.

Federal Reserve policymakers are on the same page. They indicated in their December meeting economic report that they expect their short-term benchmark’s target range (now 5.25% to 5.5%) will drop by 0.75 points in the new year. Interest rate futures go further, implying at least a 1.5-point decrease.

To be sure, market forecasts are notoriously unreliable and tend to reflect the investment climate when they are rendered. The average Bloomberg prognostication for 2022 was an S&P 500 advance of 3.9%, on the theory that after the 27% jump the year before, investors needed a breather; instead, the index ended up falling 19.4% as the Fed surprised investors with an aggressive tightening campaign.

Certainly, things could go awry in 2024. International tensions may worsen, such as the war in Ukraine spilling into the rest of Europe. Domestically, current worries could heighten and dislodge the best of plans. Example: Many junk-rated U.S. companies face a maturity wall in coming years, with large amounts of their bonds coming due, raising concerns about their ability to pay the principal and restructure at higher rates.

The big question of late is how much of 2024’s equity performance will be driven by the Magnificent Seven, whose thundering rise in 2023 pulled the entire market aloft. The S&P 500’s 2023 performance of 24.4% is thanks to the Seven’s disproportionate influence. The Magnificent Seven (so named by Bank of America analyst Michael Hartnett in early 2023, inspired by the movie) have generated a 106% return as of mid-December, by Bespoke Investment’s count.

The rest of the index, known as the “Mediocre 493,” were collectively up 6%. “Over the past several quarters, the rest of the S&P, excluding those seven names, has missed out on this the bull market,” says Burns McKinney, senior portfolio manager at NFJ Investment Group.

The seven mega-cap outperformers—Apple, Alphabet, Microsoft, Amazon, Meta, Tesla and Nvidia—are not the same, with Nvidia leading in price gains (up 240% in 2023) and Apple trailing (ahead 49%), but let’s face it: Even Apple’s advance is impressive, and it is the largest company on earth by market cap.

The Seven all boast commanding positions in their fields (think artificial intelligence-oriented chips and Nvidia), strong balance sheets, growing earnings and revenue. As a recent Schroders commentary noted, “These companies are some of the most profitable and cash flow generative in the world. For that reason, they command higher-than-average valuations in the stock market.”

Indeed, price/earnings multiples are high for the Seven, which up to now have had no problem attracting legions of investors. A propellant added this past year: They all boast strong positions in AI. 

Still, despite their stature, the Mag Seven cannot expand perpetually, skeptics argue. Their typical mantra is that “trees cannot grow to the sky”—in other words, there is a natural limit to growth, and a propensity of stocks to return to their historical level. “Although we wouldn’t want to be short the Magnificent Seven stocks,” says NFJ’s McKinney, “reversion to the mean suggests that investors should find leadership in other areas of the market in 2024.”

The Seven’s doubters point to lists of market leaders from previous decades, which had big turnover. In 1990, for instance, the top 10 market caps included just one tech company, International Business Machines. The biggest name was Exxon Mobil. These companies are still around and, for the most part, are doing fine, but they are not the rulers of the market anymore.

Obvious weaknesses among the Seven, which could possibly lead to a decline, are hard to spot now. Still, Apple, whose $3.03 trillion market value dwarfs all others (Microsoft is in second place at $2.78 trillion), does display problems that suggest to some that its eminence will erode over time: Unlike the others, Apple is mainly dependent on hardware, and its key products—the iPhone, the iPad and the Mac—are seeing their huge revenues hit a ceiling. “Look at the iPhone: 52% of sales, it has no growth,” Walter Piecyk, co-founder of research outfit Lightshed Partners, told CNBC. “Sometimes, [market] leadership changes.”

New Leaders May Emerge

Wall Street projects better earnings in 2024, absent that long-awaited recession, of course. Such a development, says McKinney of NFJ, should broaden the market’s leadership. “Overall S&P earnings estimates have turned upward after a couple of down quarters, and that should be the catalyst” for non-Mag Seven stocks to do well, he reasons. 

What could catch fire in the new year? Bank of America listed several stocks that should do well. General Electric, for instance, is spinning off its energy and renewables business to become an aviation pure play, a theme the bank contended will entice investors.

BofA analyst Andrew Obin wrote in a report that the aviation unit should produce 59% year-over-year earnings-per-share growth in 2024. Reshoring of critical industries will be a big help to the jet engine maker, he argued. Airlines are upgrading and expanding their fleets, and both Boeing and AirBus use GE engines.

Other overlooked, non-Mag Seven tech stocks are poised for big futures, some analysts insist. Cybersecurity is a big deal nowadays, and Palo Alto Networks is regularly touted as the top player in this arena. Wedbush analyst Daniel Ives has raised his price target to $350 from $290 for 2024. It now changes hands for $295. Analysts expect its EPS to rise 23.7% in 2024, and cash flow is projected to double. The company is noted for its firewalls, which are not degraded by the addition of new features. 

While the Seven are piling into AI, it is hardly a foregone conclusion that they will end up the winners in this arena. With an eye on AI, a Goldman note pointed out that leaders in tech are constantly changing.

The Negative Scenario

When the Magnificent Seven all fall, it’s the reverse of the current bull run for the S&P 500; a Mag Seven slide means the rest of the index does poorly. This has happened just once, in 2022, when interest rates soared and the economy looked precarious: The Seven collectively lost 39%, dragging down the S&P 500 19.4%. That year, the drops ranged from 25% for Apple and Microsoft to 64% for Meta and 65% for Tesla, Morningstar figures show.

The Seven’s 2022 decline illustrates the overarching reality that how the stock market fares has a lot to do with economic growth. The U.S. economy has been expanding annually at low single digits throughout this century, except for two recession years (2009 and 2020: minus 2.6% and minus 2.8%, respectively) and recovery year 2021, up 5.9% from a low base.

Earnings, linked to the economy, are a major impact on how the market does. Profit growth for the companies in the S&P 500 has been fairly flat for 2023, per FactSet. Bulls take heart over predictions that 2024 should produce a solid earnings climb of 11% from expected 2023 results, according to strategists polled by the research group.

Year-end 2023 predictions are for a continuation of the past low-single-digit trend in economic growth. After all, U.S. employment remains solid, at 50-year record highs—as wages and consumer sentiment rise and people keep spending. There are some crosscurrents, of course, such as a rise in credit card delinquencies and bankruptcies—the latter rose 10% in 2023.

Forecasters polled by the Federal Reserve Bank of Philadelphia peg 2023’s gross domestic product growth at 2.4% and 2024’s GDP increase at 1.7%. The top five Wall Street firms are in that camp, with projections ranging from Citigroup’s 1.1% to Goldman’s 2.1%.

Nonetheless, what if these forecasts are wrong, as they have been in the past, and macroeconomic forces thwart that anticipated earnings surge? The Russia-Ukraine or the Hamas-Israel wars could ignite a global conflict. The U.S. presidential elections could spark violence and disruptions. A more deadly COVID-19 variant could sweep over the world. None of that would be good for the U.S. economy, corporate earnings or stock performance.

Lurking behind the outlook for lower GDP expansion in 2024 is this swarm of anxieties. That is why, in the event of an economic slump, it’s prudent to bet on the big stocks, LPL Financial declared in an analysis. The thinking: The Seven’s nosedive in 2022 is unlikely to recur, as it took place during extraordinary circumstances, namely a simultaneous descent for both stock and bond markets.

LPL, which expects a mild recession in 2024, advised: “Large caps perform better during periods of economic uncertainty” like a recession. And the Magnificent Seven will be happy to see the popularity of their shares spiraling ever upward.

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