Magnificent 7: buy every dip?

Summary:

• The Magnificent 7+ stocks have accounted for roughly half the wealth creation in the S&P 500 the past 5 years.
• Without the Magnificent 7+ stocks, there has been no earnings growth on the Nasdaq 100 in aggregate the past two years.
• Their earnings growth and profit margins are head and shoulders above the S&P 500.
• Their R&D budgets give them a front seat on future tech like quantum computing, space exploration and robotaxis.

Just how well the Magnificent 7 have done

With NASDAQ: TSLA share price sharply rebounding on Trump’s announcement that he would not sell his Tesla, investors are being reminded of the power of buying the dip on the Magnificent 7+ stocks once more.

It can help to remember how important these companies are and how well they’ve done.

Sometimes called the “FANGs”, “Magnificent 7+”, or “Baatmmann” stocks, the largest 10 stocks on the Nasdaq have carried the US share market higher in recent years.

Over the past 5 years, the S&P 500 has created US$20.3 trillion in new wealth (i.e. net change market capitalisation). Remarkably, almost half – US$9.2 trillion – of this has been created by these 10 companies alone. This is reflected in the table above.

Putting these numbers in perspective, the entire market capitalisation of the ASX 200 in April 2025 was US$1.8 trillion. Meaning Nvidia alone has created more wealth in the past 5 years than the value of the entire ASX 200.

Outperformance is driven by fundamentals

Their outperformance owes to their superior earnings.

The earnings per share (EPS) of the Magnificent 7+ has grown on a CAGR of 29% over the past 10 years. By contrast, the EPS of the S&P 500 have grown on a 10-year CAGR of just 9%.

This consistent and steady earnings growth owes to their capturing the premium end of their markets, which is where the marquee clients (scale) and pricing power (margins) both are. The result is that since Covid-19, there has been a widening gap between the simple average profit margin of the Magnificent 7+ stocks and the other companies in the Nasdaq 100.

Going forward

Our industry is fond of disclaiming that past performance is no guide to the future. Investors may naturally wonder whether the future will be as rosy as the past.

In our view, the investment thesis for the Magnificent 7+ rests on two things:

• Their research and development (R&D) budgets. They recycle their growing revenue into placing ever-larger side bets on developing future tech, like self-driving cars and quantum computing. These side bets mean the Magnificent 7+ “embed optionality” on megatrends, in the jargon.
• They act like venture capital funds without the fees. The Magnificent 7+ are constantly investing in and acquiring growing companies and startups. Buying shares in the Magnificent 7+ therefore means you participate in sophisticated VC activity without the 2% management fee and 20% performance fee structure.

Are they overvalued?

Investors that may find the Magnificent 7+ stocks compelling often ask about valuations. Sure enough: these companies trade on higher multiples than the broad market.

In our view, the higher valuations are justified—and it is unrealistic to expect to get these companies for below-market valuations. Why?

The growth – earnings, sales, cash flow – of the Magnificent 7+ is unlike anything else. If investing history tells us anything, it is that investors pay more for growth. Here, it is illustrative to see that if we take out the Magnificent 7+ stocks, profit (net income) growth on the Nasdaq 100 has gone backwards in aggregate the past two years.

The kind of steady and reliable earnings growth that the Magnificent 7+ provide is becoming harder to find on the US share market. And when earnings growth is scarce, investors pay more for it. The most extreme end of this can be seen in US small caps. Companies making any kind of profit are steadily disappearing from the Russell 2000 Index.

Conclusion

The Magnificent 7+ stocks have driven – and sometimes outrightly carried – the US and global share market higher on the back of superior earnings. This has meant that dips - of the kind we've seen on Tesla last week - have been attractive lower entry points when and if rebounds occur. 

A new wave of ETFs

The newly-listed ETFS Magnificent 7+ ETF (HUGE) gives investors exposure to the largest 10 US companies on the NASDAQ Stock Exchange.