Mag 7 – When Too Much Success Becomes a Risk

Over the past three years, we’ve enjoyed strong market performance, with the S&P 500 repeatedly hitting all-time highs and earning double-digit returns. However, a large part of the market’s success can be attributed to only a handful of companies known as the Magnificent Seven (Mag 7). As technology has evolved and artificial intelligence (AI) utilization has surged, this group of companies has dominated the daily news and much of the S&P 500’s returns. Let’s dive deeper.

The Mag 7 companies include Apple, Microsoft, Alphabet (parent company of Google), Amazon, Meta Platforms (parent company of Facebook and Instagram), NVIDIA, and Tesla. Each of these companies leads a major segment of the modern economy such as AI chips, cloud infrastructure, digital advertising, smartphones, e-commerce, and electric vehicles. Many of us use the products and services of these companies daily. In writing this article, I’m using a Microsoft operating system, numerous Google searches, and AI tools that rely on NVIDIA’s chips. Meanwhile, my Apple iPhone buzzed to notify me that an Amazon delivery arrived at my house. All this to say, these companies are ingrained in our daily lives, particularly as we rely more and more on technology both at work and home.

Over the past couple of years, AI went from a seemingly sci-fi term to something we hear about (and use) daily, and the Mag 7 companies are behind that change. NVIDIA’s graphic processing units (GPUs) enabled the training of large AI models, which are used by the other six companies to build AI into their software and hardware products. As the capabilities of AI have expanded, companies have rushed to embed it into their systems and processes, which has super-fueled the AI buildout, further growing these Mag 7 companies. The result: soaring revenues, expanding market share, and ballooning market capitalizations. That dominance, however, comes with a lesser‑discussed risk: market concentration.

In a market-cap-weighted index like the S&P 500, larger companies have a larger influence and given the growth of the Mag 7 firms over the past couple of years, their representation within the S&P 500 has grown as well. Historically, the top 10 holdings in the S&P 500 have averaged about 24% of the market value and now the Mag 7 make up about 40%. This means that when the Mag 7 perform well, the entire S&P 500 does too. It gives the impression that the “rising tide” is lifting all the “boats” in the market, when in fact many of the remaining 493 stocks in the index—sometimes called the S&P 493—experienced much different returns from the benchmark itself. The following chart illustrates this by showing the Mag 7 returns (red line) compared to the S&P 500 as a whole (blue) and the S&P 500 minus the Mag 7 or S&P 493 (green).

This type of market hype isn’t a new phenomenon. It occurred before in the 1970s (Nifty Fifty era) and the 1990s (Dot-com era). In the Nifty Fifty era, there was a group of roughly 50 blue-chip growth stocks that were considered buy-and-hold-forever names, which included Coca-Cola, IBM, McDonald’s, Walt Disney, Polaroid, Xerox, Johnson & Johnson, P&G, and Philip Morris. Investors considered them bulletproof at any price—even as valuations rose sky-high. Then in 1973–74, the market took a nosedive—down 48%—but many of the Nifty Fifty stocks fell more (Walt Disney down ~80% and McDonald’s down ~70%). Although many of these businesses remained healthy and are still great stocks to own today, investors overpaid at the time, and it took many years for them to recover. Similarly, in the Dot-com era, investors became overly excited by the rise of the internet, and they purchased any internet-based company they could find. While stock prices soared, investors would soon learn that many of these companies lacked real revenue. From peak to trough, trillions of dollars in market value evaporated, and many dot-com companies were either purchased for pennies on the dollar or went bankrupt.

However, the Mag 7 companies today are not dot-com gambles; rather they are highly profitable companies with healthy balance sheets and extended valuations based on real earnings. While their valuation metrics seem high, the Mag 7 stocks trade at lower valuation multiples than the dot-com era stocks in 2000, even though their market weight is higher.

Whether you’re a big believer in the Mag 7 leading the way forward into a tech-fueled future or you’re nervous about the hype, it’s important to understand the role these companies play in our markets and in your portfolio. At Bragg Financial, we recognize that even the most experienced investors cannot predict the future with certainty. Rather than relying on forecasts or attempting to consistently identify every market winner, we choose to focus on building diversified portfolios across sectors and industries. This disciplined approach reflects our belief in prudent risk management and long-term success. We want our stock portfolio model to have exposure to these large, growing companies, but in a measured way. We would prefer to own the Mag 7 names at smaller weights than the market to ensure that we take part in the upside but remain diversified should these names decline. Importantly, we also rebalance portfolios regularly so as positions exceed their target weights, we look to trim them back and take some chips off the table, if you will. While this can lead to realizing gains, we believe rebalancing the portfolio will lead to improved risk and return characteristics. This concept is discussed in more detail by my teammate, Anthony Bykovsky, in his recent article The Hidden Risk of Success: Why It’s Important to Realize Gains.

The market will continue to evolve, with new leaders emerging, while some of today’s leaders remain dominant and others take a backseat. We’re choosing to focus less on predicting the success of a handful of names and more on maintaining a disciplined, diversified strategy.

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.