Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 553

Are expectations for the Magnificent Seven too high?

Investing is hard. Seeing stocks that you own fall in price and resisting the urge to sell takes a strong stomach. Seeing stocks that you find expensive soar without you is no fun, either. It takes discipline to tame the fear of missing out. That emotional rollercoaster means that in investing, knowledge is cyclical, not cumulative. We learn the same things over and over again. It’s rare to see something truly new.

As we’ve seen, the market’s current obsession is with artificial intelligence (or AI) and the ‘Magnificent Seven’: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. As a group, they represented 70% of the S&P 500’s 2023 return. Standout winner Nvidia closed the year up 239%, while Apple, the relative laggard, returned 48%. Today, those seven companies command as much market value as the ‘Foreign Five’ (China, Japan, India, France, and UK) – the largest developed stockmarkets outside the US by market value.

While these tech giants have dominated the headlines in recent years, this phenomenon is nothing new. Before our recent market darlings, we had the FANG quartet (Facebook, Amazon, Netflix, and Google). Go back even further and you’ll find the BUNCH companies—Burroughs, Univac, NCR, Control Data and Honeywell—the forgotten darlings of the mainframe computing era. After soaring to dizzying heights for many years, they too eventually came back down to earth.

So, what lessons can we learn from history and are there any markers that can help navigate the current zeitgeist?

Valuations vs expectations

The key is in valuations and expectations. Stocks go up when results are better than investors anticipated. So, you make money by owning businesses as their outlook brightens. Sometimes that means buying the business when others think the outlook is dim. The higher the valuation, the higher the expectations, and the greater the scope for potential disappointment.

Today, the valuations of some of the mega-cap giants are incredibly high. That sets a high bar. For some of them, expectations are so high that they must deliver blindingly fast growth simply to justify their current prices.

Take Microsoft, for example. While Microsoft may make $101 billion in operating profit, the market then expects it to grow at 10-15% a year – so it needs to grow profits by $10-15 billion a year, compounded over time. That’s like growing a brand-new Coca Cola in 2024, and then another in 2025, and so on.

Even the growth expectations for Nvidia are astounding. In 2023, as a whole, Nvidia presented revenues of almost $61 billion, up 126% from a year ago. Having beat market expectations in the fourth quarter, Wall Street expects Nvidia to grow by 35% per annum for at least half a decade. Even for the best companies in the world, such growth rates are really hard to sustain.

The trouble is that growth potential is clear to everybody. So those expectations are already reflected in the stock’s price. Today, that price is high. Nvidia trades at 20 times estimates for next year’s sales. That’s 20 times the top line, before any expenses. It’s not impossible for a business to deliver the sort of growth now expected of Nvidia. It’s just exceedingly rare.

The sobering reality

We decided to see how rare. Since 1990, just 230 stocks in the FTSE World Index have ever sustained 30% revenue growth for more than five years. That’s just 7% of the 3,400 relevant stocks in the Index. The feat is even rarer for large companies. Just 45 businesses have ever delivered that kind of growth after cracking the top 200 of the Index.

The hit rate is higher for huge expensive companies, suggesting that markets do have some signal. 23% of huge companies trading for more than 10 times sales have gone on to sustain 30% revenue growth. But that is less encouraging than it first appears. The flip side is that three-quarters of the time, it doesn’t play out. Three-quarters of the time, huge expensive companies don’t deliver the blazing growth now expected of Nvidia.

Valuations reflect expectations and in the investing world, high expectations can often lead to disappointment. If we take a long view of history, that’s often the pattern and valuations are often highest just after a company has burned brightest. 

Beyond the Magnificent Seven

Fortunately, there is an alternative to chasing the leading lights. Look beyond the Magnificent Seven, and there are thousands of companies out there—many of which will have brighter futures than the market now expects. In 2023 alone, many good-sized companies returned more than Apple’s 48% return.

But the spotlight doesn’t shine on these businesses. It’s hard to tame the fear of missing out, especially when the companies leading the way continue to beat expectations quarter after quarter. But rather than crowding into giant companies that must continue to shine brightly just to hold their prices, we much prefer to invest in companies that trade at discounted valuations and are trying to clear a lower bar. It is more rewarding to be there before their time to shine.

The important thing is that with such an uncertain backdrop, now is a critical time for investors to be open-minded and adaptive—as continuing to stick with past winners is no guarantee of success, especially when the valuations trend of the Magnificent Seven begin to strongly resemble the Nifty Fifty of the 1970s.

 

Shane Woldendorp is an Investment Counsellor at Orbis Investments, a sponsor of Firstlinks. This article contains general information at a point in time and not personal financial or investment advice. It should not be used as a guide to invest or trade and does not take into account the specific investment objectives or financial situation of any particular person. The Orbis Funds may take a different view depending on facts and circumstances.

For more articles and papers from Orbis, please click here.

 

RELATED ARTICLES

The 'Heady Hundred' case for unglamorous growth

The case for and against US stock market exceptionalism

Simple maths says the AI investment boom ends badly

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 628 with weekend update

Australian investors have been pouring money into US stocks this year, just as they start to underperform the rest of the world. Is this a sign of things to come? This looks at 50 years of data to see what happens next.

  • 11 September 2025
Exchange traded products

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement

We need a better scheme to help superannuation victims

The Compensation Scheme of Last Resort fails families hit by First Guardian and Shield losses, as well as advisers who are being wrongly blamed for the saga. It’s time for a fair, faster, universal super levy solution.

Investment strategies

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Economy

How bread vs rice moulded history

Does a country's staple crop decide elements of its destiny? The second order effects of being a wheat or rice growing country could explain big differences in culture, societal norms and economic development.

Investment strategies

Small caps are catching fire - for good reason

Small caps just crashed the party like John McClane did in the movie, Die Hard - August delivered explosive gains. With valuations at historic lows, long-term investors could be set for a sequel worth watching.

Defensive growth for an age of deglobalisation, debt and disorder

Today’s new world order appears likely to lead to a lower return, higher risk investment environment. But this asset class looks especially well placed to survive, thrive, and deliver attractive returns to investors.

Economy

Will we choose a four-day working week?

The allure of a four-day week reflects a yearning for more balance in our lives. Yet the reliability of studies touting a lift in productivity is questionable and society may not be ready for such a shift anyway.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.