MW Don't count on 'Magnificent Seven' stocks repeating their winning streak this year, these Wall Street gurus warn

By Gordon Gottsegen

Burt Malkiel, economist and author of 'A Random Walk Down Wall Street,' calculated what would happen if you only bought last year's winning stocks

Just because a stock outperformed last year doesn't mean it'll continue its winning streak. In fact, only buying last year's winners may actually come back to haunt you.

Two investing experts, Burt Malkiel and Alex Michalka, decided to run the numbers to show why.

Michalka is the vice president of investment research at investing platform Wealthfront. Malkiel is a professor and economist who is known for his book "A Random Walk Down Wall Street" and who now works as Wealthfront's chief investment officer.

Malkiel and Michalka co-wrote a paper where they looked at historical data to show what would happen if an investor constructed a portfolio on Jan. 1 that solely consisted of the top-performing companies from the previous calendar year. They assumed the investor would reconstruct their portfolio at the start of each year to include the new set of winners, while excluding any companies that would've gone bankrupt or stopped trading before the new year was over.

To add more evidence to their theory, they constructed multiple "winners" portfolios of different sizes - with five, 10, 15 and 20 stocks. Next, they populated those portfolios with four different market-cap tranches to include more variables and different strategies. This gave them 16 different winners portfolios to work with, and they compared those 16 portfolios to the overall growth of the U.S. stock market from 1964 through the end of 2023.

They found that, on average, those winners portfolios underperformed the market.

The average annual return across all 16 winners portfolios was about 9.6%. Meanwhile, the average annual return of the U.S. stock market was about 10.4% - more than 0.7% higher.

Not only that, but sticking to a portfolio of only winners introduced a lot more volatility. Annualized volatility for the average winners portfolio was 43.1%, but only 17.5% for the U.S. stock market at large. On top of that, the worst year for the average winners portfolio saw a minus 55.7% return, while the worst year for the stock market over this period saw a minus 36.7% return.

Higher volatility, larger drops and lower returns may be more than your typical retail investor is willing to tolerate. So Malkiel and Michalka suggested that most investors don't bother with this strategy.

"Outperformers can come back to earth eventually - either because of a correction or because the high expectations eventually become priced in - but the larger point is that it's very difficult to consistently pick individual stock winners year after year," Michalka told MarketWatch. "Instead of trying to predict the future, investors would be better off investing in the broader stock market so they get exposure to these outperformers without risking all of their assets on a few companies."

Although retail investors may be better off investing in market-tracking ETFs, it may be hard to resist the temptation of loading up your portfolio with buzzy stocks. After all, it seemed like everyone was talking about Nvidia Corp. $(NVDA)$ and the "Magnificent Seven" stocks MAGS and their outperformance in 2024.

However, the paper floats that winners don't necessarily stay winners forever - and that may be true for the Magnificent Seven.

"[The paper] suggests that last year's winners, such as the Mag Seven, will not necessarily be winners in 2025," Malkiel told MarketWatch. "Of course, in some years recent winners will repeat, but it's no guarantee. And a repeated strategy of always buying recent winners could fail even if there is some momentum in the market."

Although Nvidia's stock gained about 239% in 2023 and another 171% in 2024, it has traded more than 10% lower in the first month of 2025 - partially due to a steep selloff on Monday. While momentum may change for that particular stock, investors may see an entirely new set of winners by the end of this year.

-Gordon Gottsegen

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January 30, 2025 13:00 ET (18:00 GMT)

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