Can "Magnificent Seven" ETFs Retain Their Glory in 2025?

The so-called "Magnificent Seven" stocks — Apple AAPL, Alphabet (GOOGL, GOOG), Microsoft MSFT, Amazon AMZN, Meta META, Tesla TSLA, and NVIDIA NVDA — were on a spectacular ride in 2024 and drove much of the year’s broader market gains. Notably, the S&P 500 was up 23.3% in 2024 and Roundhill Magnificent Seven ETF MAGS gained 66.5% in the year.

The Mag 7 companies take a notable share of the S&P 500 and hence accounted massively for the index’s gains. These accounted for 23.1% of all S&P 500 earnings in  Q3 of 2024, with the proportion expected to increase to 25.8% in Q4. Those seven stocks are expected to bring in 23.3% of total S&P 500 earnings in 2025 and 33.8% of the index’s total market cap.

Through three-quarters of reports, the combination of those seven stocks saw earnings grow year over year by 33% in 2024 compared to just 4.2% growth for the other 493 S&P 500 companies, per FactSet data, as quoted on Yahoo Finance.

Will Their Magnificence Lose Luster in 2025?

Some experts believe that the dominance of those seven stocks is expected to moderate in 2025. Earnings growth for these seven companies outdid the rest of the S&P 500 in 2024, but this margin is projected to narrow significantly in 2025. Goldman Sachs’ chief U.S. equity strategist David Kostin suggests that this shift could lead to a more balanced performance across the broader market, as quoted on Yahoo Finance.

"The narrowing differential in earnings growth rates should correspond with a narrowing in relative equity returns," Kostin stated, predicting a lower gap in performance between the Magnificent Seven and other S&P 500 companies. Kostin believes that the group will beat the other 493 stocks by just 7 percentage points in 2025, the narrowest level of outperformance from the Magnificent Seven dating back to 2018.

Inside Earnings Prospect of “Mag 7”

The Q4 of 2024 earnings for the ‘Magnificent 7’ group of companies are expected to be up 20.7% from the same period last year on 12.3% higher revenues. This follows the group's 32.9% earnings growth in Q3 on 15.4% higher revenues. Earnings of “Mag 7” are expected to be up 15.6% in 2025, per Zacks Earnings Trend issued on Dec. 18, 2024.

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AI Euphoria to Spread in Other Areas Beyond “Mag 7”

BofA's equity strategy team, led by Savita Subramanian explained that Microsoft, Amazon, Alphabet and Meta alone are expected to have increased capital expenditures by 42% in 2024 and boost them by another 17% in 2025, pushing their total spend next year to $244 billion, as quoted on Yahoo Finance.

All of this spending is not on AI chips. Tech companies are also increasing the spending to pay for the power required to run AI data centers. So, the focus will be great on AI utilities and software in 2025. Utilities sector XLU, which was up 17.8% in 2024, has been a beneficiary of AI optimism.

Note that unlike AI hardware, which is a one-time sale, meaning demand would wane at some point of time, AI software is sold on a subscription basis. This indicates that demand for AI software will always stay. SPDR S&P Software & Services ETF XSW (up 29.2% in 2024) and SPDR NYSE Technology ETF XNTK (up 26.5% in 2024) are some of the ETFs that gained more than 25% in 2024 and are well-positioned for 2025.

Why Should You Bet on “Mag 7” ETFs Despite Slowing Earnings Growth?

We may see growth slowdown in “Mag 7” stocks next year, but their prominence will still remain strong due to the ongoing AI boom. NVIDIA’s Blackwell chips are yet to work wonders, overshadowing other lingering concerns (like slowing revenue growth), per Morgan Stanley, as quoted on Business Insider. (read: Palantir vs. NVIDIA ETFs: Better AI Plays for 2025?).

Tesla should thrive on political ground. CEO Musk’s emerging political presence might extend Tesla’s influence beyond the automotive industry. Analysts are optimistic on the potential benefits of federal deregulation for Tesla, which derives 33% of its valuation from the AV business. Deregulation could streamline the approval process for Tesla’s full self-driving (FSD) software and Robotaxi services.

The Fed may be acting less dovish currently, but the rates will definitely remain lower in 2025 than in 2024, which is great for tech stocks. As the tech sector relies on borrowing for superior growth, borrowing more money for further initiatives is cheaper when interest rates are low.

If these were not enough, Citi strategist suggested that the Magnificent Seven stocks could function as a defensive play in 2025 amid market uncertainty. These stocks' fundamentals are so strong that they could provide stability during times of uncertainty.

ETFs in Focus

Along with MAGS, investors can thus bet on other exchange-traded funds (ETFs) that are heavy on “Mag 7.” These funds include MicroSectors FANG+ ETN FNGS, Vanguard Mega Cap Growth ETF MGK, Invesco S&P 500 Top 50 ETF XLG and iShares S&P 100 ETF OEF.

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