The Magnificent Seven tech stocks — Amazon (AMZN), Apple (AAPL), Alphabet (GOOG, GOOGL), Nvidia (NVDA), Meta (META), Microsoft (MSFT), and Tesla (TSLA) — have dominated 2023's headlines, as well as the S&P 500 (^GSPC). Continuously outperforming expectations in spite of higher interest rates, can these stocks keep their shine with the Federal Reserve signaling an end to rate hikes?

Envestnet Co-Chief Investment Officer Dana D'Auria joins Yahoo Finance to discuss stock market forecasts for 2024 and provides alternatives to the Magnificent Seven for investors to put in their portfolios.

D'Auria explains that since many companies have yet to figure out AI, it becomes "a lot to expect, you're pricing in a very rosy scenario in there" when it comes to betting big on the Magnificent Seven, and therefore investors should broaden out their horizons with smaller cap stocks.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

- What would need to happen for the Magnificent Seven to see that next leg higher here? Because I think for all of what has transitioned and the hype phase and now into the show me story for a lot of the generative AI kind of fodder the conversation and so forth, 2024 seems like there's going to need to be delivery, maintenance of, and continuation-- continuity for a lot of that sentiment to prevail and push these stocks even higher.

DANA D'AURIA: I completely agree in your comments earlier in your broadcast. I mean, I think the problem with AI is that, the expectation that it's suddenly going to massively increase productivity I think is putting a lot of expectation on something that is at the end of the day, relatively new. Most companies don't yet know how they're going to make benefits from AI even if the benefits are possible, right?

So markets are short term in nature and if we're pricing in particularly into the Magnificent Seven, an expectation and, you know-- right? The NVIDIA's of the world. If we're pricing in an expectation that the AI boom happens sort of next year in terms of actually see the economics the corporate finance aspect of things, I think it's a lot to expect.

And again, you're pricing a very rosy scenario in there. That's not to say that the long run potential of this technology is not massive. It's just the expectation of markets for it to happen so quickly.

- So Jane if you do expect to see a broadening out here in terms of participation, where do you expect that leadership to come from?

DANA D'AURIA: I think, as I say, the beaten down stocks, these small cap companies that haven't hadn't participated and just massive gap between what you were seeing in the large cap growth for example and small cap growth, I think now there's some catching up that happens with that.