The "Magnificent Seven" Stocks Are Soaring Toward a Bull Market: 2 Ideal Index Funds to Buy Now

The S&P 500 (SNPINDEX:$SPX) soared 15.9% in the first half of 2023, and the index is now just 5% below its all-time high. Seven stocks, dubbed the "Magnificent Seven" by Wall Street, accounted for 73% of those gains. In other words, they are almost single-handedly driving the S&P 500 toward bull market territory.

Investors familiar with the FAANG stocks will recognize many of the Magnificent Seven. The group includes:

• Apple (NASDAQ:AAPL)
• Microsoft (NASDAQ:MSFT)
• Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL)
• Amazon (NASDAQ:AMZN)
• Nvidia (NASDAQ:NVDA)
• Tesla (NASDAQ:TSLA)
• Meta Platforms (NASDAQ:META)

Those seven companies are collectively worth more than $11 trillion -- here's what investors should know.

Image source: Getty Images.

Wall Street is bullish on the Magnificent Seven stocks

The Magnificent Seven produced returns ranging from 36% to 190% in the first half of the year, but Wall Street remains bullish on the entire group. All seven stocks have a consensus rating of "buy" among analysts, according to CNN Business, and the highest 12-month price targets imply upside of 20% for Tesla, 23% for Apple, 27% for Meta Platforms, 27% for Microsoft, 56% for Alphabet, 63% for Amazon, and 63% for Nvidia.

Of course, investors should never put too much faith in short-term price targets. Not even the wisest Wall Street analysts can predict the future. That said, all seven stocks are backed by a solid investment thesis.

1. Apple

Apple has a dominant presence in several consumer electronics verticals, especially tablets, smartwatches, and smartphones. But its burgeoning services business is the future because it allows the company to monetize its installed base of 2 billion devices with adjacent products like cloud storage, mobile app fees, and financial services. Apple has a particularly strong foothold in two of those markets. Its App Store pulls in twice as much revenue as its closest rival, and Apple Pay is the most popular mobile wallet in the U.S.

2. Microsoft

Microsoft is the market leader in enterprise software-as-a-service products, and Microsoft Azure is the second-largest provider of cloud services in the world. The company is leaning into artificial intelligence (AI) in both segments, and Morgan Stanley analyst Keith Weiss recently said Microsoft was the software company best positioned to monetize generative AI.

3. Alphabet

Alphabet's Google is the largest adtech company in the world due to the immense popularity of Google Search and YouTube, and Google Cloud Platform is the third-largest cloud services provider. Also noteworthy, Alphabet-owned Waymo was the first company to commercialize autonomous ride-hailing services, and the robotaxi market is expected to explode in the coming decade.

4. Amazon

Amazon operates the most-visited e-commerce marketplace in the world, and its ability to engage consumers and collect shopper data has snowballed into a booming digital ad business. Amazon has quietly become the third-largest adtech company in the world, and it's gaining ground on Google and Meta. Additionally, Amazon Web Services has led the cloud computing market for 12 years and counting, and it was recently recognized as a leader in cloud AI developer services.

5. Nvidia

Nvidia holds more than 90% market share in workstation graphics chips and supercomputer accelerators, and Forrester Research says its semiconductors are synonymous with AI infrastructure. Nvidia has also solidified its importance in the data center by branching into high-performance networking equipment, and it has extended its ability to monetize AI by delving into subscription software and cloud services.

6. Tesla

Tesla is the market leader in battery electric vehicle sales, and it reported the highest operating margin among volume carmakers last year, an accomplishment that supports CEO Elon Musk in his conviction that the company possesses superior manufacturing capabilities. Tesla will undoubtedly benefit as electric vehicles become more prevalent, but its largest opportunities lie in autonomous vehicles. Tesla plans to build a robotaxi next year, entering a market that Ark Invest estimates will be $9 trillion by 2030.

7. Meta Platforms

Meta Platforms is the second-largest adtech company in the world. That success stems from the immense popularity of its social media networks: Instagram, WhatsApp, and Facebook all ranked among the 10 most-downloaded mobile apps worldwide in 2022. Those platforms already reach billions of users each day, but Meta is leaning into AI to improve user engagement and sharpen its advertising capabilities.

How to invest in the Magnificent Seven stocks

Investors looking for exposure to the Magnificent Seven can, of course, buy all seven stocks. But index funds like the Vanguard S&P 500 ETF (NYSEMKT:VOO) and the Vanguard Mega Cap Growth ETF (NYSEMKT:MGK) may be more prudent options because they diversify your investment across a broader range of businesses.

The Vanguard S&P 500 ETF tracks 500 large-cap stocks that represent a blend of value and growth, and 24% of its assets are invested in the Magnificent Seven. Alternatively, the Vanguard Mega Cap Growth ETF tracks 96 large-cap growth stocks, and 56% of its assets are invested in the Magnificent Seven.

Here's the bottom line: Both index funds bear below-average expense ratios, but the Vanguard S&P 500 ETF is the less risky option because it allocates capital across a more diversified group of businesses. However, the Vanguard Mega Cap Growth ETF has been the better performer. It returned 325% over the last decade, while the Vanguard S&P 500 ETF returned 225%.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool'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 Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon.com, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, Tesla, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.