Why ‘Magnificent Seven’ stocks such as NVIDIA and Microsoft ranked first in 2024
Megacap technology stocks regained control of U.S. stock markets as the S&P 500 hit another record high, defying Wall Street’s hopes for a broader rally.
Since the start of 2024, the so-called Magnificent Seven will have a total market capitalization of $540.7 billion, compared with an increase of $802.5 billion for the S&P 500 SPX through Tuesday’s close, according to Dow Jones Market Data. got it. Nvidia Corp. loves flying artificial intelligence. Some members of the group, including NVDA,
Their stock price is up more than 25%.
By comparison, the Magnificent Seven added a total of $5.117 trillion to their market capitalization in 2023, while the S&P 500 added $6.502 trillion, according to Dow Jones market data. Nvidia, the best-performing member of an elite group of technology stocks, is up nearly 240% in the past year, according to FactSet data.
Nvidia and Microsoft Corp once again in the new year. MSFT,
Both companies have attracted a lot of investor interest in artificial intelligence, with strategists and portfolio managers seeing them as de facto leaders of the AI boom.
Both companies are set to hit record highs on Wednesday, with Microsoft seeing its market capitalization surpass $3 trillion for the first time. Meanwhile, Nvidia was scheduled to end Wednesday’s session with a market capitalization above $1.5 trillion for the first time.
But after briefly seeing small caps and other undervalued segments catch up late last year, why has Big Tech made such a durable comeback while other sectors of the market have struggled to keep up? -Profit in 2023?
Several portfolio managers and market strategists who spoke to MarketWatch for this story shared similar accounts.
Big tech companies fare better when investors bet on higher interest rates or reconsider their expectations of aggressive rate cuts, as investors have done recently, according to Jay Hatfield, CEO and portfolio manager at Infrastructure Capital Advisors. They tend to produce results.
“There’s a conventional wisdom that technology stocks are more sensitive to interest rates than other stocks, but that’s actually not the case,” Hatfield said.
This ability to outperform despite high interest rates stems from the tech giant’s low debt levels, stable cash flow, and above-trend earnings growth.
“Higher interest rates do not increase the cost of capital, and these companies have higher growth rates than most sectors of the economy, so growth expectations are low,” said Rob Haworth, senior director of investment strategy at U.S. Bank Wealth Management. “I will not abandon you,” he said.
Still, the fact that Nvidia is up another 25% since early January has surprised many on Wall Street. Especially those who had expected a rotation favoring small-cap stocks and unprofitable technology companies, which benefited the most during the fourth trading session. Quarter rally.
But while the Magnificent Seven dominate the league table once again, Hatfield pointed out that the situation in the new year does not accurately reflect what happened in 2023.
For example, two members of the group were noticeably behind in the new year. Tesla Inc. TSLA,
The company, which reports earnings after the bell Wednesday, has fallen 16% year-to-date through Wednesday’s close, lagging its large-cap peers, according to FactSet data.
Tesla’s weakness and Apple Inc. AAPL’s poor performance;
Hatfield et al. describe the “Fabulous Five” (Nvidia, Microsoft, Amazon.com Inc. AMZN;
Alphabet Inc. GOOGL,
exorcism,
and Meta Platforms Inc. META,
— probably makes more sense than the “Magnificent Seven” at this point.
Investors will probably want to consider these five stocks and Broadcom Inc. AVGO,
and Advanced Micro Devices AMD,
And grouping them together into baskets that focus more on AI themes, Hatfield added.
“I think the real story is not just Mag 7, it’s artificial intelligence,” Hatfield told MarketWatch. “And where the AI boom is unfolding is in the cloud and in chips.”
As for the factors that have helped push these stocks back to market-leading positions, Hatfield believes it is primarily a result of investors rethinking their expectations of aggressive interest rate cuts starting in the coming months.
While small-cap stocks require lower interest rates and a higher growth environment to succeed, large-cap technology names are well-positioned to succeed in any environment.
And while valuations for Big Tech names are certainly problematic, neither Hatfield nor Haworth believe these stocks are overvalued at current levels.
In fact, as Haworth points out, the forward price-to-earnings ratio for the Nasdaq-100 NDX, which has the largest exposure to megacap technology among major U.S. indices, is currently around 25. This is much lower than 30. The index traded again in 2020.
Invesco QQQ Trust Series 1 QQQ,
The ETF tracking the Nasdaq-100 closed Wednesday up 0.6% at $425.83 per share.
Few big tech companies have yet reported earnings for the final three months of 2023, but chip stocks like Nvidia and Taiwan Semiconductor Co. The strong guidance and rosy numbers shared by TSM led to an uptick.
That was when the world’s largest contract chipmaker reported earnings earlier this month.
Still, few expect the S&P 500 to be able to rise forever without the rally extending at some point. Hatfield said he expects to see more participation once the Federal Reserve begins cutting interest rates later this year.
To be sure, there are still some skeptics who believe that the market’s over-reliance on a few technology names could spell trouble in the not-too-distant future.
Barry Bannister, a longtime market strategist at Stifel, pointed out in emailed comments to MarketWatch that narrow growth-driven markets existed in 1929, 1972 and 1999, and that all ended in crashes in 1930, 1973 and 2000.
“What seemed like a good idea at the time ended in tears for investors,” Bannister said.
