Nvidia has won over 3000% only in the last five years – but the high returns of the AI chip maker AND other tech giants in the Magnificent Seven (Nvidia, Amazon, Apple, Meta, Microsoft, GoogleAND Tesla), are not without their risks, warns an industry expert.
In one “Smart Investment” video interview published Wednesday, Eric Bailey, executive director of The Bailey Group at Steward Partners, a wealth planning and investment strategy firm, weighed in on the impact of the Magnificent Seven on the market.
“These few stocks have produced just tremendous returns,” he said, pointing to Nvidia over 100% stock growth from year to day. “And the returns over the last three, five years are staggering.”
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An example of Nvidia's high returns occurred last week when CEO Jensen Huang cashed in 1.3 million shares and earned $169 millionthe most it has earned so far in a single month.
Nvidia CEO Jensen Huang. Photo: I-Hwa Cheng/Bloomberg via Getty Images
However, there are risks. Bailey noted that the Magnificent Seven drove “most of the return to the index.”
In 2023, the Magnificent Seven returned 75.71% compared to the S&P 500's 24.23%. As of Tuesday, the group comprises approx 35% of the market value of the S&P and its combined stocks have risen approx 380% in the last five years.
This extraordinary growth is “concerning” because any slowdown or weakness in these companies “will be very significant,” according to Bailey.
“These companies need to continue to produce strong revenue, earnings to keep this momentum going,” he said.
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Investors will “of course” continue to buy shares of the Magnificent Seven and continue to be rewarded — but extremely high valuations come with risks, too, Bailey said.
“You have to be careful when you invest in these companies,” he warned.
Some of those risks were on full display two weeks ago, when Nvidia shares fell 16% and the company lost more than $500 billion in market capitalization in three days — more than all market cap i Samsung OR Costco.
Shares recovered and it is approx 178% year to date at the time of writing.