magnificent

The Magnificent Seven is more than just a Western from the 1960s. Today, the term refers to the group of innovative companies that have driven stock market gains in recent years. They are technology names you probably know well, from Nvidia to Meta Platforms, and they’re all involved in the high-growth area of artificial intelligence (AI). These players have helped the S&P 500 climb in the double-digits this year, too, and even reach record levels.

But the Magnificent Seven aren’t the only game in town, and two other stocks in particular may give them a run for their money over the next five years, as AI infrastructure spending soars and customers seek capacity for their AI workloads. Right now, these two AI stocks are charging forward and already have outperformed the Magnificent Seven so far this year — but this movement may not be over. Let’s check out the two players that may crush the Magnificent Seven in the years to come.

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1. CoreWeave

CoreWeave (CRWV -3.32%) has climbed more than 250% since its market launch earlier this year, but that doesn’t mean it’s used up all of its fuel. The company may just be getting started, and that’s because it offers up a service in high demand today — and into the future. I’m talking about AI infrastructure capacity.

CoreWeave, thanks to its 250,000 graphics processing units (GPUs), has a lot of computing power to offer — and customers can easily rent it as needed, even on an hourly basis. This means they don’t have to invest in purchasing costly GPUs but still can access the power they need for the training and inferencing of their models, for example.

To make the picture even sweeter, Nvidia plays a key role in the CoreWeave story. The chip giant holds a 7% stake in the company and recently pledged to buy any unused capacity through 2032 — this removes a great deal of risk from CoreWeave stock.

Finally, CoreWeave’s revenue has been exploding higher, growing more than 400% in the first quarter from the year-earlier period — and more than tripling in the latest quarter year over year. Considering the great need for AI capacity to power the training of AI and its application in the real world, the company should continue to see strong demand — and this may send the stock to greater gains than those of the Magnificent Seven.

2. Broadcom

Broadcom (AVGO -5.90%) stock has advanced nearly 50% so far this year, but this company, too, could keep marching higher in the coming years as cloud service providers focus on scaling up AI infrastructure. The company is a networking giant, known for thousands of products found in a variety of places — from smartphones to data centers.

But this data center business has driven growth as the AI boom picked up momentum. Customers are turning to Broadcom for networking solutions, needed to connect the many compute nodes that power AI workloads across data centers. Broadcom is an expert here and has seen its Tomahawk switches and Jericho routers fly off the shelves.

The company also represents a future winner in the area of computing power as it designs AI accelerators, known as XPUs — but doesn’t necessarily compete with chip giant Nvidia. The XPU is a custom accelerator, made for specific purposes while Nvidia’s chips are high-powered for general use. This makes it easier for Broadcom to carve out market share, serving a customer’s specific needs and offering a product that may be complementary to Nvidia’s. In the recent quarter, Broadcom announced a $10 billion order for XPUs — and analysts say the customer is top AI lab OpenAI.

The AI business has resulted in significant revenue gains in recent quarters — for example, in the latest one, Broadcom reported AI revenue growth of 63% to $5.2 billion. And this trend could continue if Nvidia chief Jensen Huang is right: He expects AI infrastructure spending to climb to $3 trillion or $4 trillion by the end of the decade, and Broadcom clearly could benefit from this stage of the AI boom. And that suggests this stock may crush the Magnificent Seven players as this AI infrastructure story unfolds.

If you’re thinking about investing in the stock market today, you may be wondering whether it’s a better idea to go with the big names in the “Magnificent Seven” or to simply hold a position in the entire S&P 500.

The Magnificent Seven refers to some of the most prominent growth stocks in the world: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. Investing in these companies has yielded strong returns for investors over the years. Meanwhile, the S&P 500 makes for a more balanced investment overall, as it gives investors broader exposure to the market while still growing over the long term. By having a position in the 500 best stocks rather than just the top seven, there’s much more diversification.

Which option should you go with today, if your focus is on long-term growth?

Image source: Getty Images.

The Magnificent Seven are magnificent, but they could be overdue for a decline

One way you can gain exposure to the Magnificent Seven is by investing in the Roundhill Magnificent Seven ETF (MAGS -3.81%). The fund invests in just the Magnificent Seven and, thus, can be an easier option than investing in each stock individually. Since its launch in April 2023, the fund has soundly outperformed the S&P 500, rising by more than 165% while the broader index has achieved gains of around 64%.

Many of the Magnificent Seven have benefited from an uptick in demand due to artificial intelligence (AI) and have been investing heavily in next-gen technologies. However, many investors worry that a bubble has already formed around AI stocks and that spending could slow down, especially if there’s a recession on the horizon. If that happens, then these stocks could be susceptible to significant declines.

While these stocks have been flying high of late, back in 2022, when the market was in turmoil due to rising inflation and as investor sentiment was souring on growth stocks, each of the Magnificent Seven stocks fell by more than 26%. The worst-performing stocks were Meta and Tesla, which lost around 65% of their value. That year, the S&P 500 also fell, but at 19%, it was a more modest decline.

The S&P 500 is more diverse, but that doesn’t mean it’s risk-free

If you want to have exposure to the S&P 500, you can accomplish that by investing in an S&P 500 index fund, such as the SPDR S&P 500 ETF (SPY -2.67%). Its low expense ratio of 0.09% makes it a low-cost, no-nonsense way of tracking the S&P 500. Its focus is to simply mirror the index, and it does a great job of that.

The problem, however, is that while the S&P 500 will give you exposure to more stocks than just the seven best stocks in the world, how those leading stocks do will still have a significant impact on the overall stock market. And the Magnificent Seven, because they are so valuable, are also among the SPDR ETF’s largest holdings.

But even if you were to go with a more balanced exchange-traded fund, such as the Invesco S&P 500 Equal Weight ETF, which has an equal position in all S&P 500 stocks, that may only offer modest protection from a wide-scale sell-off. In 2022, the ETF declined by 13%.

You’re always going to face some risk when investing in the stock market, especially if your focus is on growth stocks, which can be particularly volatile.

What’s the better strategy for growth investors?

If your priority is growth, then going with the Magnificent Seven can still be the best option moving forward. These stocks will undoubtedly have bad years, but that’s the risk that comes with growth stocks. However, given their dominance in tech and AI, the Magnificent Seven still have the potential to vastly outperform the S&P 500 in the long run, and their gains are likely to far outweigh their losses.