Will tech giants like Alphabet, Amazon, and Nvidia retain their dominance, or fade like the sequels to the classic Western, The Magnificent Seven? In this, his latest blog, Sheldon MacDonald, CIO at Marlborough, explains why, as the AI boom matures and global markets shift, diversification remains key and smaller, more agile companies and sectors like energy and aerospace are gaining traction. Amid volatility and political changes—including Donald Trump’s return to the White House—Sheldon reminds us why a balanced portfolio, spanning themes and market caps, is as vital in 2025 as ever.
The first The Magnificent Seven movie is routinely acknowledged as one of the best Westerns ever made. Based on Akira Kurosawa’s classic Seven Samurai, it boasts both an excellent plot and a stellar cast.
Its sequel, Return of the Seven, is something of a pale imitation. Critically panned upon release, it’s arguably saved from total ignominy only by the fact that the great Yul Brynner once again tops the bill.
Thereafter, alas, the series completely loses its lustre. Guns of the Magnificent Seven severs pretty much any meaningful link with its predecessors, while The Magnificent Seven Ride! barely qualifies as a weary retread.
Will the investment sphere’s own Magnificent Seven follow a similarly diminishing trajectory over time? Might they go the way of some of the fallen dot-com darlings of yesteryear? At least at present, it’s not easy to say whether the follow-up is significantly better or worse than the original.
Collectively, Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla accounted for almost a third of the S&P 500 index’s $40 trillion market capitalisation in 2023. This figure climbed to more than a third last year[1].
Yet 2024 wasn’t all plain sailing for the mega-cap technology titans. There were occasions when every one of them struggled[2]. Shares in Tesla were especially volatile[3].
As a result, the financials sector frequently outstripped its tech counterpart over the course of the year[4]. More broadly, alongside Nvidia – which remained a poster child for the rise of artificial intelligence (AI) – 2024’s outstanding performers included airline, aerospace and energy businesses[5].
This by no means implies the Magnificent Seven could be hurtling towards Ride! territory. But it does show diversification in the equities sphere is as important as ever – and 2025 is likely to further underline this truth.
Looking beyond the obvious
Since it played such a decisive role in driving equity returns last year, let’s first consider where the AI boom stands as 2025 gets under way. A key point here is that the “hype” stage has essentially passed.
By way of simple illustration, wind back to 2023 and remember how thoroughly awestruck you were when you first encountered ChatGPT. Now reflect on how often you found interacting with it mildly irksome in 2024.
This shift in sentiment is easily explained. To quote Henry Ajder, a leading expert in the field of AI-related global legislation and corporate strategy: “We’re moving beyond the moment of wonder.”[6]
In other words, what matters now isn’t AI’s underlying “wow” factor. The focus is instead switching to effective implementation, successful application and the consequent creation of real value.
Going forward, as Ajder has remarked, individuals and organisations will demand much more from AI. They will want it to make a tangible difference to workflows, outcomes and the bottom line.
As the search for genuine solutions intensifies, the marketplace is likely to become increasingly crowded. The dominance of the major players may persist against such a backdrop, but businesses further down the market-cap spectrum could get a chance to shine.
Why might we expect them to seize this opportunity? Historically, smaller companies have repeatedly proved themselves more agile and innovative than their larger, more established rivals.
This can give them an edge in responding to – or even fuelling – positive disruption. Crucially from an investment perspective, it can also enhance their potential to deliver growth over the long term.
Drivers of diversification
Growth, of course, is high on the political agenda for 2025. Nowhere is this more apparent than in the US, where Donald Trump’s second spell in the White House will be heavily geared towards cranking the American economy into overdrive.
With this goal in mind, the President-Elect’s new administration is conspicuously loaded with business figures. Most notably, despite Tesla’s aforementioned wobbles, Elon Musk is set to head the new Department of Government Efficiency.
The rest of the world will no doubt watch what happens with bated breath, keen to see if Trump and his team can deliver a blueprint worth following. In many ways, though, the race to keep pace is already taking shape.
In Europe, for example, further interest rate reductions may be in the offing. Ditto bigger defence budgets. Meanwhile, China is stepping up attempts to reinvigorate domestic consumerism and spend its way out of an enduring slowdown.
A wider transition towards lower rates and deregulation could set the scene for greater participation in multiple markets. Again, this is likely to shed fresh light on the investment attractions of companies right across the market-cap scale.
Naturally, the year ahead will also bring risks. Policy missteps, ongoing geopolitical tensions and the structural challenges of high government debt are among the likeliest. With US equities priced for perfection and multiples at stretched levels, investors may also face more volatility.
Taking all the above into account, holding only a handful of stocks that are centred on a single theme seems less than prudent. The case for a sensibly diversified portfolio appears rather more compelling.
Ultimately, although cinema is hardly a reliable guide to investing, it may be worth recalling that the first Magnificent Seven film ends with four of the heroes in graves. In retrospect, perhaps a little more diversification would have helped them, too.
Sheldon MacDonald is CIO of Marlborough.
[1] See, for example, Visual Capitalist: “Charted: Magnificent 7 market cap as a share of the S&P 500”, December 11 2024 – https://www.visualcapitalist.com/sp/charted-magnificent-7-market-cap-as-a-share-of-the-sp-500/.
[2] See, for example, Barron’s: “Mag 7 stocks are dragging down the market”, November 21 2024 – https://www.barrons.com/livecoverage/stock-market-today-112124/card/mag-7-stocks-are-dragging-down-the-market-3XMfcTlWeJ8Jgqxq8Qak.
[3] See, for example, Reuters: “The Magnificent Seven Monitor”, as at December 16 2024 – https://www.reuters.com/data/magnificent-seven-monitor-2024-10-30/.
[4] See, for example, CNBC: “Financials are the best-performing stocks of 2024. Here’s one corner that could do especially well” – November 27 2024 – https://www.cnbc.com/2024/11/27/financials-are-best-performing-stocks-of-2024-one-corner-could-outperform.html.
[5] See, for example, Yahoo: “With 2024 almost over, there are the five top-performing stocks in the S&P 500”, November 6 2024 – https://finance.yahoo.com/news/2024-almost-over-5-top-010000989.html.
[6] See, for example, Creating the Future: “Artificial intelligence: then, now and next,” December 13 2024 – https://creatingthefuture.org.uk/insights/artificial-intelligence-then-now-and-next/.
