Are the Magnificent 7 stocks losing their luster?

By Mark Hulbert

Newsletters like just two of the Magnificent 7 stocks

Market leadership in coming weeks will continue to shift further away from the Magnificent 7 stocks that, up until this summer, had so dominated the market.

The latest thing pointing toward this shift is a list of large-cap stocks that are currently recommended for purchase by at least two of the top-performing newsletters monitored by my performance-auditing firm. Of the seven erstwhile "magnificent" stocks, just two make the list: Apple (AAPL) and Google-parent Alphabet (GOOG) (GOOGL).

In total there are 61 stocks that are currently recommended for purchase by at least two of these newsletters. Absent from this group are the remaining five of the "Magnificent 7": Amazon (AMZN), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).

I'm focusing this column on large-cap stocks because we're entering the season in which the large-cap advantage over small caps historically has been the greatest. This history is summarized in the accompanying chart, which reflects performance since 1926. Notice that the smallest-cap stocks on average have beaten the largest-cap stocks by the greatest amount in January, and that their advantage declines as the year progresses. By the fourth quarter, the seasonal winds are blowing in favor of the large caps over the small caps.

There is a theoretical basis for expecting this pattern to persist, according to a study by Lucy Ackert, a professor of finance at Kennesaw State University, and George Athanassakos, a professor of finance at the University of Western Ontario. They traced the pattern to the compensation incentives under which institutional money managers operate. Their original study into this pattern appeared in 2003, and in another study three years ago they confirmed that the pattern continues to exist.

Compensation incentives have this impact because they induce money managers as year-end approaches to make their portfolios look more like the S&P 500 SPX. That means they will sell the smaller-cap stocks that are underrepresented in that benchmark and buy the large-cap stocks that dominate it. January is when those incentives shift back in favor of small caps, which accounts for that month being the one in which these smaller stocks have produced their best average relative return.

Notice that this seasonal shift in the performance of small and large stocks is separate from longer-term trends in their relative returns. As is well known, small-cap stocks over the last decade have lagged the large caps by unusually large amounts, leading some analysts to predict that the pendulum is due to swing back in the small caps' favor in coming years.

Those analysts may very well be right, of course. But if the annual seasonal cycle in small and large stocks' relative performance continues to persist, you might want to wait until the beginning of the year to make a bet on the small caps' resurgence.

Meanwhile, the table below contains the 10 largest cap stocks currently recommended by at least two top-performing newsletters.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

-Mark Hulbert

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09-09-24 1334ET

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