Yr two of Wall Street’s bull market rally didn’t disappoint. When the finish line was crossed, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite respectively gained 13%, 23%, and 29% in 2024.
While a confluence of things is liable for this outperformance, corresponding to the rise of artificial intelligence (AI) and Donald Trump’s victory in November, the foundational catalyst that helped lift Wall Street’s three major stock indexes to multiple record highs last 12 months was the outperformance of the “Magnificent Seven.”
The Magnificent Seven is comprised of seven of the most-influential firms on Wall Street:
Two traits define these seven businesses. The primary, which I’ve already touched on, is their historic outperformance. These seven firms have run circles across the benchmark S&P 500 over the trailing decade. Whereas the S&P 500 has gained nearly 189%, not including dividends, during the last 10 years, Amazon, Tesla, and Nvidia have respectively skyrocketed by 1,350%, 2,710%, and 28,610%!
The opposite consistent characteristic of the Magnificent Seven is their sustained competitive benefits inside their respective industries.
But while these seven firms share similar traits, their outlooks meaningfully differ for 2025. Because the bull market looks to increase right into a third 12 months, one Magnificent Seven stock stands out as a bargain, while one other is price avoiding in 2025.
Amongst this group of greater than a half-dozen outperformers, Alphabet stands out because the cream of the crop in the brand new 12 months.
Though we’ll dive into Alphabet’s higher-margin growth opportunities in a moment, the very first thing to notice is its absolute dominance in web search. Over the trailing decade, Google has accounted for 89% to 93% of worldwide web search share. In other words, businesses have made Google their go-to when targeting their message(s) at users, which is often great news for Alphabet’s ad-pricing power.
Alphabet can also be the parent company of streaming platform YouTube, which is the second most-visited social site behind Meta’s Facebook. The proliferation of Shorts (short-form videos lasting lower than 60 seconds), coupled with roughly 2.5 billion monthly lively users, should steadily improve YouTube’s subscription and ad-pricing power.
To construct on the above, history is most definitely in Alphabet’s corner. Though ad spending tends to be highly cyclical, periods of economic growth last substantially longer than recessions. This can be a way of claiming that ad-fueled firms like Alphabet spend a substantial portion of their time basking within the sun, quite than sulking under the proverbial clouds.
Nevertheless, Alphabet’s longer-term growth prospects primarily hinge on its cloud-service platform. Google Cloud is predicted to deliver sustained double-digit revenue growth. Businesses are still within the relatively early stages of accelerating their cloud-service spending. Further, Alphabet’s incorporation of generative AI solutions into Google Cloud must be helpful to its customers and dramatically increase operating money flow from this segment within the latter-half of the last decade.
Alphabet’s veritable treasure chest of money on its balance sheet is a competitive edge, as well. It closed out the third quarter with $93.2 billion in money, money equivalents, and marketable securities, which affords a hearty capital-return program. Except for Apple, no other S&P 500 company has repurchased more of their stock during the last decade than Alphabet — $286.7 billion, as of Sept. 30, 2024.
Lastly, Alphabet’s valuation is smart for opportunistic long-term investors. Its shares are currently valued at 15.7 times forecast money flow for 2025, which represents a 13% discount to the corporate’s average multiple to money flow over the trailing-five-year period.
Image source: Getty Images.
Nevertheless, not all Magnificent Seven components are necessarily price buying. As we power forward into 2025, the one member I’d suggest steering clear of is none aside from Nvidia.
There are actually tangible catalysts that specify why Nvidia has gained well over $3 trillion in market value during the last two years. At the highest of the list is its utter dominance of AI-GPUs. The corporate’s H100 GPU (commonly known as the “Hopper”) and next-generation Blackwell chip are the “brains” of high-compute data centers.
Nvidia has also undeniably benefited from AI-GPU scarcity. Demand for the corporate’s AI solutions has handily swamped supply, which has allowed Nvidia to charge a premium price for its products. The final result has been a double-digit point increase in the corporate’s gross margin.
The priority is that each one of Nvidia’s catalysts have been greater than fully baked into its share price.
As an example, competition is picking up from all angles. On top of direct GPU developers (e.g., Advanced Micro Devices) increasing their output, Nvidia could lose out on worthwhile data center real estate due to actions of its top customers.
Microsoft, Meta, Amazon, and Alphabet are a few of Nvidia’s core customers by net sales, and so they’re all developing GPUs to make use of of their respective data centers. Though these chips won’t match the Hopper or Blackwell when it comes to computing speed, they are going to be more available and considerably less expensive than Nvidia’s hardware.
President-elect Donald Trump’s November victory also adds big-time query marks to Nvidia’s future. Trump previously announced plans to implement a 35% tariff on imported goods from China on his first day in office, which could lead on to testy trade relations with the world’s No. 2 economy. This comes atop Joe Biden’s administration restricting shipments of high-powered AI chips and related equipment to China since 2022.
History is not any friend of Nvidia, either. Over the past three many years, there hasn’t been a next-big-thing innovation or technology that is avoided an early stage bubble-bursting event. The reason for these boom-bust cycles is investors overestimating the early stage adoption and/or utility of latest technologies. Given that almost all businesses lack well-defined plans to generate a positive return on their AI investments, it could appear that artificial intelligence is the subsequent in a protracted line of bubbles.
Finally, Nvidia’s valuation is worrisome. Although its forward price-to-earnings (P/E) ratio is not egregiously high, its price-to-sales (P/S) ratio of 32 (which was north of 40 in June and July) is consistent with a multiple where other market-leading businesses rolled over during previous bubble-bursting events.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Idiot’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Idiot’s board of directors. Sean Williams has positions in Alphabet, Amazon, and Meta Platforms. The Motley Idiot has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Idiot recommends the next options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure policy.