The influence of the so-called “Magnificent Seven” technology companies on U.S. stock markets has waned as investors focus on concrete results rather than just the potential of artificial intelligence.
The seven biggest tech companies – Microsoft, Apple, Amazon, Alphabet, Meta, Tesla and Nvidia – accounted for most of last year's stock market gains as traders bet they would benefit from the growth of AI. But the gap between them has widened as all but one have reported financial results in recent weeks.
“It’s no longer trading as a block,” said Jim Tierney, a growth portfolio manager at AllianceBernstein. “Last year everyone got the AI halo. . .1707025583The market is beginning to focus on the individual prospects of each of the Magnificent Seven rather than treating them as a single security.”
While four of the seven companies continued to outperform the broader stock market, Alphabet underperformed the S&P 500 and Tesla and Apple were the two biggest drags on the index. Tesla has fallen sharply so far and is now struggling to maintain its place among the top ten most valuable companies in the US.
Nvidia, which reports its fourth-quarter results in late February, has seen the most direct continuation of last year's AI-focused trend. Its shares are up another 34 percent, boosted by other companies' AI investment plans.
Meta, Microsoft and Amazon are among those that have doubled their AI spending, but their stocks have been supported by more prosaic factors such as strong sales and, in Meta's case, the announcement of its first-ever dividend. In contrast, Apple investors were rattled by weaker sales in China and Tesla was hit by a warning of slowing growth.
“People are looking at the details,” said Fawaz Chaudhry, head of equities at Fulcrum Asset Management. “At least at Tesla, I would say that some of the shine in AI was undeserved.” .[and]Apple has been less clear about how it will monetize its data using AI.”
As 2023 draws to a close, macroeconomic trends provided additional tailwinds to both mega-cap stocks and smaller companies, but recent economic data and central bank updates have increased pressure on companies to deliver.
Falling inflation raised hopes that interest rates were near their peak, leading to a broad rally towards the end of the year. In recent weeks, however, investors have scaled back their expectations about the speed at which interest rates will fall.
Lower interest rates increase the valuation investors are willing to pay for riskier assets like stocks. The Fed is still expected to start cutting interest rates later this year, but with much of the benefit already priced in, most investors don't believe the price-to-earnings ratio can rise any further. This will increase the importance of profits for further share price increases.
“Going into earnings season, investors were already very bullish on some of the larger stocks, so the bar for outperformance was higher,” said Vishal Vivek, a strategist on Citi's equity trading team. “It was the companies that really gave investors something special that traded higher.”
The recent change in tone has seen Warren Buffett's Berkshire Hathaway and drugmaker Eli Lilly overtake Tesla in terms of market capitalization.
In particular, Eli Lilly's strong performance – the stock has almost doubled in the past year on strong demand for new weight-loss drugs – underscores the fact that there are at least a few topics besides AI that have piqued investor enthusiasm. Novo Nordisk, Eli Lilly's Danish rival, has also risen sharply.
But investors hoping for a broader expansion of market gains have so far been disappointed. Amanda Agati, chief investment officer of PNC Financial Services, said: “Our wish for Christmas was a resurgence in stocks at the lowest level of 493.” [in the S&P 500]. So far we have coal in our stockings. . . There is still a very narrow market leadership.”
The S&P 500 is up 4 percent since the start of the year. The strongest drivers of the gains have shifted slightly – Apple, Tesla and Alphabet were recently replaced by Eli, Berkshire and Nvidia rival AMD – but in some ways the market rise was even more concentrated than in 2023.
The equal-weighted version of the S&P 500 rose just 0.2 percent, while the benchmark index rose 4 percent. Last year, the seven largest contributors accounted for around 60 percent of market growth; They have been responsible for more than 80 percent of the increase so far this year.
Agati said there is hope that the fourth-quarter earnings season will help boost confidence in the rest of the market. But with almost half of companies having now submitted reports, the results so far have been mixed.
Recommended
According to FactSet, the S&P 500 is on track to post a 1.6 percent year-over-year profit increase in the fourth quarter of 2023. However, without the original Magnificent Seven, profits would have declined by more than 8 percent.
“You will see more differentiation between the megacaps, and that seems to be the case,” said Michael Grant, head of long/short strategies at Calamos Investments. “But let’s not forget why the dominance of these companies exists. . . Outside of these names, the overall earnings outlook for the equity world is muted.”
Comments are closed.