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Investor Spotlight: Can the ‘magnificent seven’ continue to ride to the rescue?

In this week’s Investor Spotlight, we examine the 2023 stock price performance of seven of the world’s largest companies, the drivers of the price appreciation and the growing risks.

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Shock and awe share price rallies

Ok just to be clear here, we are not talking about a 1960s Western movie, but seven of some of the largest market-capitalised stocks in the US, make that the world, ex Saudi Aramco.

The seven stocks are Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla.

Apple crashed through the US$3 trillion valuation for the second time in its history on the last day of trading in June, retaking this accolade from the January 2022 peak.

Apart from being notable for their size, the share price performance since the start of 2023 has been nothing short of a shock and awe exercise.

Following a dreadful 2022, when Tesla fell -65% and Meta -64%, Alphabet -39%, Microsoft, and Apple -25%, this year has seen a complete U-turn, notes Morningstar research.

“As of June 20, Nvidia stock is up 192% in 2023, Tesla stock is up 112%, and Meta stock is up 134%. The shares for the other four firms are clocking gains north of 40%.”

Source: Morningstar

Combining the size of these companies and the price rally, more than 70% of the total returns of the MSCI ACWI index is attributable to the seven, while more than 95% of the MSCI USA Index is a result of the seven and they account for 26% of the index weight.

Why did the ‘magnificent seven’ rally so hard?

As to why the seven have been such stellar performers is less clear.

You may recall Tesla’s first-quarter earnings lacked the shine of even the 2022 results and Apple reported back-to-back quarters of negative revenue growth.

The FT highlights “Analysts also project full-year revenues this year of US$385billion, a fall of 2.4% and only the third decline of the past 22 years”.

Source: IG
Source: IG

Arguably these seven companies have many divisions which are highly interest rate sensitive and cyclical in nature, as well as being major beneficiaries of earnings pull through in the pandemic.

Source: IG

Alphabet and Meta are very exposed to advertising spend which is under pressure globally, Tesla has been price cutting, and Apple and Microsoft have experienced weaker demand for laptops and even iPhones.

Source: IG

The exception is Nvidia which reported an earnings beat for the first quarter of 2024. Demand for their AI GPUs is tremendously strong as companies embed the likes of Microsoft’s ChatGPT into data centres and network systems.

Source: IG

This leads to one of the reasons why these stocks really took off.

Investors have embraced the secular megatrend “AI” and all the ancillary drivers of potential long-term growth, in what may prove to be a bout of irrational exuberance.

The word bubble has been used over and again with comparisons to the run-up to the Dot-com bust of 2001.

There is no denying that the momentum followers have pushed the prices ever higher and some institutional investors have likely been caught out by not owning these stocks, which could have exacerbated the rally.

We also know that the size of the balance sheets, the global strength of the brands, combined with the cross-section of secular trends - AI, self-driving EVs, 3D headsets as well as data centre growth have all contributed.

There has also been a hefty expansion in valuations that has occurred alongside an inverted 2yr/10yr yield curve, which is historically a leading indicator of
US recession and lower interest rates.

A future drop in yields supports longer-dated assets, like technology companies.

Where to from here?

It is hard to find bullish analysts after such strong price appreciation and arguably stocks like Nvidia, which is trading on 40x future revenues look expensive. But that is not to say that it cannot run further.

Dan Ives from Wedbush, remains an Apple, Tesla, Nvidia and Microsoft bull. He also stands out as one of the more upbeat commentators.

What is certain is the durability of these mega-giant companies to navigate geo-political risks, supply chains and even demand issues. Their formidable strength, for now, is quite irresistible for trend followers.

Short interest is rising along with the upcoming quarterly earnings season and a possible July Fed rate hike, so throwing caution and patience to the wind is probably not a good risk-adjusted strategy.

For now, as investing legend Bob Farrell says in his Ten Investing Rules, “Fear and greed are stronger than long-term resolve.”

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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