Only 2 "Magnificent Seven" Stocks Are Beating the Market This Year. What's Going On?

The "Magnificent Seven" are a group of the world's largest tech stocks. Because they have become the predominant winners in the market during the past decade or so, all of the largest companies in the world are tech stocks. The first large company that isn't, drugmaker Ely Lilly, is the ninth most-valuable company in the world.

The Magnificent Seven, in order of value as of this writing, include Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA), Alphabet, Microsoft, Amazon, Meta Platforms, and Tesla. Today, Broadcom and Space Exploration Technologies are both larger than Tesla by market cap.

These companies, which are all artificial intelligence (AI) stocks, have soared to their current rankings due to rapid growth, much of which is recently associated with the explosion of AI. However, only two of them were beating the S&P 500 as of this writing: Apple and Nvidia.

^SPX data by YCharts.

Is this an ominous warning about what's happening in the markets?

Is the S&P 500 hitting new highs?

This is the fourth straight year that the S&P 500 is showing a gain. It's not uncommon for the market to remain in bull territory for four years in a row, and during the past 25 years -- since it recovered from the dot-com bubble -- it has lost value only four times annually.

As of this writing, the S&P 500 is up about 8% year to date. However, it's off its record high, and it has been little changed during the past two months.

Investors have been worried about high oil prices due to the Iran war, AI spending, and a richly valued stock market. Oil prices have been up and down since the war started in February, and that volatility has the market concerned about longer-term effects.

Higher oil prices can trickle down to higher prices in nearly every industry, since many companies rely on oil for production, and they have to pass along higher costs to consumers.

As for AI spending, Amazon stock has borne the brunt of the market's worries about it for the past few months. However, Alphabet's recent announcement about its own capital expenditure forecast, which topped Amazon's outlook at $205 billion, sent its stock down as well. In fact, Alphabet stock had been beating the market as well until the announcement. But all of the large companies have been spending quite freely, and that's worrying investors.

Lastly, investors also recognize that the market is heading toward its highest-ever valuation. The price-to-earnings ratio (P/E) is the standard valuation metric for most companies, but it has its drawbacks. It's unusable for companies that aren't profitable, and it doesn't account for anomalies, such as tax-advantaged or disadvantaged profits, one-time deviations, and inflation that distorts historical averages.

The cyclically adjusted P/E ratio, or CAPE ratio, was developed to account for most of these irregularities, and today, it stands at 41. Not only is that its second-highest figure ever since the metric was created, but it's also more than double the historical average of 17.8.

Why Nvidia and Apple are beating the market

Nvidia and Apple have both been up and down this year, but the market may see certain advantages in these stocks, the two most valuable companies in the world, as valuations rise and volatility increases. Many of the hottest AI stocks have begun to falter as fantastic gains outpace fundamental performance.

For example, chipmaker Sandisk continues to demonstrate phenomenal performance, but its P/E ratio has expanded as well, implying that stock growth is exceeding earnings growth. Many of the AI-adjacent stocks are in the same boat, and many have headed down recently.

Apple, on the other hand, laid low as AI exploded, and its cautious approach to AI development has proved to be savvy. Its iPhone remains the backbone of the company as it continues to be a hot seller, again proving that investing in its hardware, the known entity, rather than costly AI, was the right move.

Nvidia, at the same time, remains at the epicenter of the AI revolution for a number of reasons. It controls as much as 90% of the AI chip market, and it's deeply embedded in hyperscaler AI construction, so it is picking up a nice chunk of the spending.

In times like these, investors tend to head toward the safe stocks that can withstand market volatility, and Apple and Nvidia might fit the bill for many.

Jennifer Saibil has positions in Apple. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Broadcom, Eli Lilly, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.