Will the "Crucial Eight" Stocks Outshine the "Wonderful Seven" in the Year 2025?
What a thrilling year it was for the stock market in 2024! The S&P 500 saw a substantial increase of over 27%, marking the continuation of the bull market for the second consecutive year. A significant portion of these gains can be attributed to the so-called "Magnificent Seven" stocks, which are some of the world's largest tech and artificial intelligence companies. With market caps ranging from $1.5 trillion to $3.8 trillion, a positive shift in any of these mega-cap companies can significantly impact the overall S&P 500 index. Nearly all of the Magnificent Seven observed substantial growth in 2024. As we move into 2025, will these stocks maintain their dominance and be named the Fateful Eight?
Bank of America analyst Michael Hartnett introduced the term "Magnificent Seven" in 2023, classifying a group of stocks that demonstrated exceptional performance from financial, market, and technological perspectives. Here's how the Magnificent Seven performed throughout 2024 up until December 25:
All Magnificent Seven stocks surpassed the broader market, with the exception of Microsoft (-1.73%), and the average performance of the group was almost at 69%. This is an impressive feat, as the Magnificent Seven represents approximately one-third of the market-cap weighted S&P 500 and more than half of the value of the Nasdaq Composite.
Lately, the On The Tape podcast, hosted by Wall Street veterans Dan Nathan, Guy Adami, Danny Moses, and Liz Young Thomas, introduced a new group of key tech giants: their "Fateful Eight." This group consists of the Magnificent Seven and expanding to include chipmaking and software giant Broadcom (-1.47%). Broadcom's market cap recently surpassed $1 trillion, and over the past month, the stock has experienced more than a 45% increase in value.
Can the Fateful Eight carry the market in 2025?
Following an extraordinary year, here are the forward earnings ratios for the Fateful Eight companies:
These are significant valuations, with Tesla (-4.95%) significantly outperforming the pack, while Alphabet (-1.45%) and Meta Platforms (-0.59%) seem more reasonable in their valuations. Given these valuations, many financial analysts have expressed concerns about the market's performance in 2025. However, most market experts still anticipate that the market will perform well in 2025, although not as strongly as it did the past two years.
With the market having gained about 57% over the past two years, it appears unlikely that such strong results can be repeated for a third consecutive year. However, in the late 1990s, the market experienced a five-year stretch of growth leading up to the dot-com crash, and the potential of AI seems significant given its potential markets and impact on our daily lives.
I believe that inflation and Treasury yields will play crucial roles in the performance of the Fateful Eight in 2025. Currently, the 10-year Treasury yield is close to 4.6% (as of December 26). Investors are undoubtedly concerned about the potential restart of inflation in 2025. The Federal Reserve has projected only two interest rate cuts in 2025, down from the previous four anticipated cuts. Furthermore, some have voiced their concerns regarding the impact that President-elect Donald Trump's policies may have on the economy.
Regardless, improvements in data from the labor market or the Consumer Price Index could lead to more interest rate cuts, without the possibility of a recession, boosting stocks, particularly in the tech sector, which tends to perform better in a "risk-on" environment. On the other hand, other market strategists view the Fateful Eight as defensive plays due to the uncertainties that lie ahead.
I expect the market to experience volatility in 2025. Despite this, I don't believe Broadcom's inclusion in the Fateful Eight will significantly impact the group, and I don't anticipate the Fateful Eight to surpass the Magnificent Seven in performance for 2025, given the stocks' high valuations, tougher earnings comparisons, and potential economic challenges from renewed inflation or a possible recession. The stocks may still close 2025 at higher levels than their current trading prices, but they probably won't deliver the same explosive results as they did in 2024.
Investing in the Fateful Eight, which includes the Magnifician Seven and Broadcom, could be a strategic move for those interested in finance and money, given their significant market impact and exceptional performance. However, financial analysts have expressed concerns about the high valuations of these tech giants, which could impact their performance in 2025.
