MW What to know about the market as the 'Magnificent Seven' stocks lose momentum

By David Booth

Market leadership changes, but the fundamentals of good investing never do

The next industry-defining idea might come from a company that doesn't even exist yet.

The so-called "Magnificent Seven" stocks until recently had seemed unstoppable. These seven companies - Alphabet $(GOOGL)$, Amazon.com $(AMZN)$, Apple $(AAPL)$, Meta Platforms $(META)$, Microsoft $(MSFT)$, Nvidia $(NVDA)$ and Tesla $(TSLA)$ - each delivered innovation and dominating market performance.

Recent market volatility has shaken investors' confidence in the "Magnificent Seven." Is it time to reconsider their place in your stock portfolio?

Remember that long term, broadly diversified investors who own index funds tied to the S&P 500 SPX or the Nasdaq Composite COMP, for example, will find that many smaller, innovative companies will grow into market leaders.

In the case of the "Magnificent Seven," if you've held a cap-weighted market portfolio, the growth of those companies, especially over the past few years, has automatically increased their weight, or percentage, in your portfolio. At the end of 2024, the "Magnificent Seven" stocks made up about 34% of the S&P 500's market cap and 27% of the Russell 3000 RUA. A cap-weighted fund allows investors to benefit from the rise of successful companies without making active portfolio adjustments.

So a good starting point for thinking about what percentage of your equity portfolio to allocate to the "Magnificent Seven" is about one-third. You can then think about whether you'd be comfortable with more or less exposure to those specific stocks.

Read: You may be invested in the wrong type of stocks. Here's why.

If you decide to overweight them, you're effectively betting against the market, as their current stock prices already reflect the collective wisdom of millions of investors and analysts. Markets efficiently incorporate all available information - past performance, growth potential, competition, risks and opportunities - into stock prices, especially for large, highly traded companies like these. By concentrating your investments in them beyond the index weight, you're implying that you possess superior insight or information that the rest of the market has overlooked.

'I don't make predictions about stocks, but I've seen many 'next big things' come and go.'

History shows that markets are remarkably efficient at pricing assets, making it extremely difficult to consistently outsmart them, and a concentrated bet like this is more risky. (The market's swift and strong reaction to news from Chinese AI startup DeepSeek is a recent case in point.)

I don't make predictions about stocks, but I've seen many "next big things" come and go. No one knows which companies will remain on top. When we started Dimensional Fund Advisors in 1981, IBM $(IBM)$ was the largest stock. Intel $(INTC)$ once dominated semiconductors but struggled as the industry shifted to GPUs and AI technologies. AOL was an internet pioneer only to fade as broadband and new digital models emerged. Nokia $(NOK)$ ruled mobile phones but couldn't adapt to the smartphone era. Kodak, Sears, Xerox and BlackBerry - these were all once seen as unstoppable forces until they weren't.

Diversification, on the other hand, doesn't challenge the market's pricing. Instead, it aligns with it, spreading your investments across thousands of companies, including the "Magnificent Seven," without overexposing yourself to the risks of betting everything on a few names. And it protects you if something unexpected -a "black swan" event - disrupts them and you could face significant losses. Diversification acts as your safety net, ensuring that if one stock falters, your portfolio remains on track for long-term growth.

Investing in the stock market is, at its core, a bet on human ingenuity. Over time, people and companies innovate, solve problems and create value in ways that can't always be anticipated. The "Magnificent Seven" are proof of that, but they aren't the first companies to transform the world and they won't be the last. The next industry-defining idea might come from a company that doesn't even exist yet.

The key is to diversify broadly and invest for the long term. Markets rise and fall, and the news cycle may tempt you to react. But successful investing doesn't need to rely on knowing what's coming next. It's about trusting in the enduring power of markets, innovation and your ability to stay the course.

This approach has worked for me for more than half a century, and I believe it can work for you, too. Because while the world keeps changing, the fundamentals of good investing never do.

David Booth is founder and chairman of Dimensional Fund Advisors.

More: The 'Magnificent Seven' companies just did something they haven't in two years. Goldman says it's time to make a shift.

Plus: How growing your dividends may work better than picking high-yielding stocks

-David Booth

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February 15, 2025 12:10 ET (17:10 GMT)

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