The Magnificent Seven stocks led 2023's market. Here's what the pros expect for 2024

Published Sun, Dec 24 20238:36 AM EST

Megacap technology stocks reascended the throne in 2023 after a debilitating 2022 left some investors sour on the outlook for the industry. At the end of 2022, the road ahead looked gloomy. The Federal Reserve seemed poised to continue its aggressive rate-hiking cycle and inflation remained elevated. Meta Platforms barreled toward a 64% drop for the year, while Tesla plummeted 65%. Nvidia and Amazon slumped about 50% each. Many expected the downward spiral to continue in the once beloved retail trades – Apple , Alphabet , Amazon , Microsoft , Meta Platforms , Nvidia and Tesla – now referred to as the Magnificent 7, replacing the popular FAANG acronym coined about a decade ago. A year later, and the giants seemed to have proven the world wrong. Each stock's gained at least 49% individually, with shares of Tesla more than doubling. Nvidia's up a whopping 234%, while Meta's nearly tripled. Together, the group's contributed to a large chunk of the S & P 500's yearly gain, while accounting for more than a quarter of its weighting. "Given the story, given the space, these are still the best in class, and I expect them to do well," said Jay Woods, chief global strategist at Freedom Capital Markets. "Will all seven do well? No, I think there are going to be stumbles. The stocks are really going to have to show what the next big thing is." Even after a blowout year, fueled in part by artificial intelligence enthusiasm, the investing community hasn't lost hope on the group's trajectory. While these stocks may not match the once unfathomable gains of 2023, should the economy and conditions continue faring well, many forecast another catalyst-driven year for the better part of the group. Who wins in 2024? Amazon's stock spiked 83% in 2023 after shedding half its value in 2022. Even as it outperformed the market, the e-commerce giant's gains were overshadowed by other large megacaps flaunting their latest AI innovations, with some worrying Amazon may be falling behind on AI technology . That's a misconception, according to Freedom Capital's Woods. He noted that Amazon continuously uses the technology to target consumers online. Late this year, the company also launched its own AI chips to enable AWS customers to build and run applications. AMZN YTD mountain Amazon shares in 2023 Woods also said investors aren't giving the company enough credit for alternative revenue streams, such as its recently announced Amazon Fresh unlimited grocery delivery service that could pose serious competition to rivals DoorDash and Uber Eats. Aggressively investing in new products and services for customers should also situate Amazon, along with Alphabet, for an attractive 2024, said Neuberger Berman's Dan Flax. While Alphabet made headlines early in the year with its ChatGPT chatbot competitor known as Bard, some early missteps earned it a reputation for falling behind on the AI front. Many investors expect the company to regain its dominance in 2024 as it rolls out new capabilities and its latest large language model known as Gemini. The tool should boost engagement for its search business, according to Deepwater Asset Managament's Gene Munster. GOOGL YTD mountain Alphabet's 2023 performance Meanwhile, longtime Microsoft bull Ken Mahoney is hedging his bets on the software giant in 2024 given the scope of "cash cow" verticals it operates. Apple may be a close runner up thanks to its range of consumer-facing apps and services, and gaming strength, said the president of Mahoney Asset Management. Time to diversify? Not everyone regards betting on the Magnificent 7 in the new year as a market-winning strategy. "The idea that there are only seven growth opportunities throughout the entire global equity market is categorically wrong, and our portfolios are fully embracing the broad range of attractive investments investors appear to be ignoring," said Richard Bernstein Advisors in a note. While the year-to-date data shows expanding market breadth, it also displays a narrowness that suggests the recent rally has been fueled more by speculation than fundamentals, the firm added. Data also shows the proportion of S & P 500 stocks that outperformed in the index sits at the lowest since the tech bubble. META YTD mountain Shares of Meta Platforms this year Given this setup, the firm wouldn't be surprised by a period of underperformance from the Magnificent 7 stocks and highlighted U.S. small caps, emerging markets and industrials among the themes to play in 2024. Brandes Investment Partners' Brent Fredberg expects the Mag 7 names to continue rocketing higher in 2024, but views smaller names left behind in 2023's megacap-driven rally as potential candidates for outperformance. He pointed to companies involved in DRAM memory such as Micron Technology as an example. Semiconductor companies Intel , Broadcom and Lam Research also look attractive even if Mag 7 stocks maintain their leadership position as AI proliferates, Woods said. "It's a story that is just starting to play out and we're just going to build on it going forward," he said.