If You're Selling The Magnificent 7 Following Outperformance In 2023, You Could Face This 'Nightmare Scenario' In 2024

2023 has been a remarkable year for the technology sector as the "Magnificent Seven” stocks have led the charge higher. Many are taking profits from Big Tech, but investors may be moving too soon, leaving gains on the table.

What To Know: Investors may be tempted to lock in 2023’s Big Tech gains and rotate into smaller companies and value stocks, but Joe Terranova, senior managing director for Virtus Investment Partners, believes it's possible that the Magnificent Seven could continue to climb in 2024.

During an interview Monday on CNBC’s “Halftime Report,” Terranova said, “The nightmare scenario for an active manager in 2024 is that we’re sitting here one year from today, and you have, again, a second consecutive year of significant outperformance from The Magnificent Seven, because nobody is going to position for that in 2024.”

Terranova cautioned against thinking that the turn of the calendar will automatically cause a seasonal sell-off in the technology sector. He suggested that investors might want to avoid exiting their mega-cap tech positions entirely and instead scale out slowly if necessary in order to maintain some portfolio exposure to the potential continued growth in the Magnificent Seven next year.

Nvidia Corporation NVDA shares, for example, are up 239% year-to-date, and shares of Meta Platforms, Inc. META are up over 190% in 2023. According to the Wall Street Journal, the group of stocks known as the Magnificent Seven have gained 75% collectively in 2023, while the other 493 stocks in the S&P 500 are up just 12%.

Why It Matters: Investors may be in the process of rotating from mega-caps to small-caps, as evidenced by the recent growth in the Russell 2000 Index, which consists of 2,000 small-cap companies. The Russell 2000 has gained more than 12% over the past month, and small-cap stocks may continue to rise if the Federal Reserve lowers interest rates next year.

Related News: The Equal-Weighted S&P 500 Rallied From 52-Week Lows To 52-Week Highs In A Month

Investors may want to maintain exposure to some of the Magnificent Seven stocks going into 2024 to avoid the "nightmare scenario" Terranova warned about.

"If you have positioning in the Magnificent 7 you have to maintain your positioning, and it’s just the degree in which you have that ownership. It’s not, 'I'm either in them or I'm out of them,'" Terranova said. 

Image: Pete Linforth from Pixabay