The Magnificent Seven group of megacap technology stocks must keep delivering robust earnings to maintain their dominance and outperform the broader market. The Magnificent Seven group includes Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).
That group as a whole doubled in value last year, outperforming the +54% surge of the Nasdaq 100 Stock Index ($IUXX) (QQQ). Most of the Seven stocks continued their gains this year, except for Apple and Tesla.
The megacap technology stocks have rallied on optimism about the stronger-than-expected U.S. economy, expectations that interest rates have peaked, and the outlook for sustained growth in artificial intelligence (AI). Some of the megacap stocks have started to diverge, with Meta Platforms up +34% this year and Tesla down -24%, sparking concerns that the group as a whole will be unable to maintain its dominance. Goldman Sachs said, “The fate of the magnificent seven stocks depends on their ability to deliver rapid revenue growth in 2024.”
A dispersion of growth estimates among the seven megacap technology stocks has some analysts suggesting a more selective approach is warranted for investing in the group. For example, according to Bloomberg data, Nvidia’s revenue is expected to surge +119% from a year ago compared to a -7 % decline in Alphabet’s revenue. Berenberg said they prefer to be exposed to some of the seven megacap stocks but not all of them, especially since the valuations of the U.S. technology sectors are lofty compared to their global peers.
This quarter’s earnings season has been mixed for the seven megacap stocks. Amazom.com and Meta Platforms delivered earnings results far exceeding expectations, and Microsoft posted its strongest revenue growth since 2022. However, Tesla has warned of plunging demand for electric vehicles (EVs), and its profit margins are likely to suffer from the impact of price cuts. Also, Apple, which reported better-than-expected profits, warned that demand in China for its products was weaker than expected and may remain sluggish in the medium term.
JPMorgan Chase warns that the increasing dominance of a small number of stocks is drawing similarities to the dot-com bubble, raising the risk of a selloff. However, Morgan Stanley recently listed Apple, Alphabet, Microsoft, and Nvidia among a list of high-quality stocks with overweight ratings and predicts such stocks can continue outperforming amid strong earnings revisions, saying, “We see a relative performance catch up to strong relative earnings revisions and note that the cohort can outperform in all three macro scenarios we have laid out for 2024.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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