Magnificent Seven could be a little less magnificent next year, Goldman predicts
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The Magnificent Seven's stock market dominance may be waning, Goldman Sachs suggests in an otherwise optimistic 2025 forecast.
Why it matters: The seven tech stocks — Amazon, Apple, Google, Meta, Microsoft, Nvidia and Tesla — have played a huge role in the S&P 500's fabulous run over the past two years.
- But after huge run-ups they are also, in Goldman's estimation, trading around fair value, meaning they will need to keep growing at outsized rates for shares to keep climbing.
By the numbers: The Mag 7 accounted for more than half of the 57% rise in the S&P 500 over the past two years. But year-over-year that outperformance gap has narrowed.
- In 2023, the seven stocks generated a 76% return, against a 14% return for the others, a 62 percentage point difference.
- In 2024, so far, that "premium return" gap is 22 percentage points.
- In its 2025 U.S. equity outlook, Goldman expects that premium gap could be as small as 7 percentage points as earnings growth cools.
Between the lines: For a while, some on Wall Street have fretted over market concentration — the fact that a few colossal tech companies are dominating the S&P 500.
- It's the most concentrated stock market in at least 100 years, Goldman's chief U.S. equity strategist David Kostin said in a webinar with reporters Wednesday. A JPMorgan note earlier this year called the market "increasingly unhealthy."
- In a widely read recent note, Kostin and his team wrote that episodes of highly concentrated markets, like the dot-com bubble and the 1960's Nifty Fifty era, don't last.
What to watch: There are risks to the stock market heading into 2025. Perhaps the biggest wild card is the incoming presidential administration.
- Will Donald Trump's plans to cut corporate taxes and reduce regulations fuel growth? Or will mass deportations and tariffs fuel inflation, leading to interest rate hikes? (Goldman even called their 2025 outlook "The Art of the Deal," after Trump's 1987 book.)
- On Wednesday, Kostin questioned the longevity of the AI boom — certainly the Magnificent Seven's rocket fuel.
- He also warned that a combination of fundamental factors suggest the market is "more vulnerable than normal" to significant drawdowns if there are any hiccups in the Magnificent Seven's growth.
The bottom line: Wednesday's earnings report from Magnificent Seven member and AI superstar Nvidia didn't present much in the way of hiccups.
- The company reported its latest quarterly profits more than doubled over the past year.
- Even so the stock fell a bit after-hours, CNBC reported, as the company's revenue growth forecast (+70% in the current quarter) wasn't quite as astronomical as recent quarters.
