The Magnificent Seven: A Closer Look at the Most Influential Tech Stocks
Introduction
In recent months, the biggest tech stocks in the US market have been dubbed “the magnificent seven.” This nickname has become ubiquitous in market discussions, dominating conversations among investors and analysts alike. However, the recent performances of these tech giants have raised questions about the sustainability of their dominance. In this article, we will delve deeper into the factors driving the market and explore whether it is time to reassess the glorious reputation of these stocks.
The Rise and Fall of the Magnificent Seven
When Michael O’Rourke first coined the term “the magnificent seven,” it seemed fitting as these tech stocks were responsible for a significant portion of market gains. Apple, Microsoft, Google parent company Alphabet, Amazon, Tesla, Nvidia, and Facebook parent company Meta contributed to three-quarters of the S&P 500 index gains this year. Their combined market capitalization reached an impressive $10.8 trillion. However, in the past four weeks, these stocks have experienced a decline, shedding more than $600 billion in market value.
Multiples Expansion: A Precarious Situation
One of the reasons behind the decline in these tech stocks is multiples expansion. Share prices have outpaced earnings growth, leading to inflated valuations. For example, Tesla’s stock price relative to its estimated earnings has tripled this year, reaching a staggering 60 times. Apple is trading at a multiple of 27, up from January, while Amazon remains stable at 35 times. Nvidia, supported by expected profit improvements, now trades at a multiple of 33, up from 30 in January. These high valuations have made investors cautious, and any signs of weakness can lead to a decline in stock prices.
The Need for Investor Caution
The recent performance of Nvidia is a clear indication of the need for caution. Despite the company surpassing expectations with impressive earnings, its shares failed to maintain their initial record high. This suggests that investors are becoming hesitant to chase already elevated stock prices. Similar reactions were seen with Apple and Microsoft, where strong earnings were met with disappointment from investors, resulting in stock price declines.
Prolonged Consolidation: A Possible Solution?
According to Michael O’Rourke, true consolidation is needed at these multiples. He suggests that a couple of months may not be enough, and it could take six to twelve months to stabilize these tech stocks. A prolonged consolidation period would bring valuations back to more reasonable levels and provide a healthier market environment. However, finding the catalyst for renewed growth may prove challenging, as the current earnings season has failed to inspire investors.
Earnings Season and Economic Outlook
This earnings season has seen S&P 500 companies beating revenue and profit forecasts, but those that exceeded expectations on both measures only saw marginal gains. Analysts believe that this quarter could mark the bottom of the earnings cycle for the market as a whole. However, the economic outlook remains uncertain, with weak durable goods orders from US factories and disappointing earnings from retailers. Despite these challenges, some investors find solace in a still tight job market and positive developments in certain sectors.
Conclusion
In summary, the magnificent seven tech stocks have been instrumental in driving the market, contributing significantly to the S&P 500 index gains. However, their recent decline and inflated valuations raise concerns about the sustainability of their dominance. A prolonged consolidation period may be necessary to stabilize these stocks and bring their valuations to more reasonable levels. As we navigate through this challenging market environment, investors should exercise caution and evaluate the long-term prospects of these stocks. With uncertainties in the economic outlook, it is crucial to stay informed and adapt investment strategies accordingly.
jennifer.hughes@ft.com
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When Michael O’Rourke started describing the biggest tech stocks as the magnificent seven by April, the JonesTrading strategist hadn’t realized how ubiquitous the nickname would become, dominating market discussions from mid-May when it became widely used.
The group’s recent performances, however, especially the finally flat The reaction to chipmaker Nvidia’s stunning earnings this week suggests it may be time for a less glorious-sounding moniker.
“It felt right when they were responsible for 88% of market gains – it was a truly magnificent achievement,” says O’Rourke. “I don’t like talking about seven stocks every day, but they’re still what drives the market.”
So far this year, the combined group — Apple, Microsoft, Google parent company Alphabet, Amazon, Tesla, Nvidia and Facebook parent company Meta — is responsible for three-quarters of the S&P 500 index gains. dazzling. Recently, however, they haven’t been pushing the stock higher.
The Magnificent Seven have lost more than $600 billion in market capitalization in the past four weeks. Admittedly, that’s only a 6% total decline, and they’re still worth $10.8 trillion overall. But for the first time this year, they experienced multi-week declines, even as each reported higher-than-expected earnings.
Given the continued dominance of the Magnificent Seven, such a lull in their ascent may not necessarily be a bad thing for the overall market, which is down more than 4% in the same four weeks.
The danger is that much of the group’s gains this year have come from multiples expansion, where their share prices have outpaced earnings, leaving them precariously priced for perfection.
Tesla’s stock price relative to its estimated earnings has tripled this year to a staggering 60 times, while Apple is trading on a multiple of 27, up from Jan. 19. Only Amazon has remained stable, already at an impressive 35x. Nvidia, supported by sizeable improvements in expected profits, is also now trading at a multiple of 33, up from 30 in January.
Nvidia’s performance this week alone signaled the need for investor caution. After founder Jensen Huang released data on Wednesday that blew away already-rousing expectations, his shares on Thursday failed to hold on to their initial record high and ended the day flat.
“Traders react, but investors evaluate,” said Steve Sosnick, chief strategist at Interactive Brokers. “The knee-jerk reaction was to buy the news even after buying the rumor, but after thinking for a while, investors decided not to chase an already elevated stock much higher.”
This feeling also applies to others. According to its quarterly earnings report earlier this month, Apple shares had risen by a third since January. Though data beat forecasts, shares fell 5% on the day in disappointment iPhone sales, Macs and iPads plummeted, putting further pressure on the fall line-up of new products to deliver. High-end sales have barely increased in two years.
Microsoft, meanwhile, fell nearly 4% following its earnings report late last month as its forecasts failed to impress. Such underperformance is a bigger problem when the stock is valued at 29 times expected earnings than when it was trading 22 times in January.
“True consolidation is needed at these multiples. A couple of months won’t be enough, maybe six to twelve months,” O’Rourke said.
If not the tired looking seven, the market is going to need another stimulus. It may not be easy to find. Overall, this earnings season hasn’t inspired investors. According to Barclays calculations, S&P 500 companies managed to beat revenue forecasts by 2% and profit bets by 7%. However, those who beat expectations on both measures earned just 1.2%, compared to an average of 1.7%, according to Credit Suisse.
Analysts generally believe that the past quarter should mark the bottom of the earnings cycle for the market as a whole. But the economic outlook remains bleak at best. This week’s data showed weak durable goods orders from US factories in July and several others retailers reported weak earnings. Some investors, however, continue to take comfort in a still tight job market. American Airlines pilots agreed on an immediate 21% pay hike on Monday, and new weekly jobless claims fell on Thursday.
“Earnings need to keep their end of the bargain here,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company. “Most of the market’s progress this year has been related to rising prices, not earnings growth.”
jennifer.hughes@ft.com
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