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When Michael O’Rourke began describing the biggest technology stocks as the Magnificent Seven in April, the JonesTrading strategist didn’t realize how ubiquitous that moniker would become, and it’s been on the market buzzword since mid-May. came to dominate when it became widely used.
However, the group’s recent performance, especially its ultimately flat response to chipmaker Nvidia’s spectacular earnings this week, suggests it may be time for a less glorious-sounding nickname.
O’Rourke says, “It seemed fair when they accounted for 88 percent of the market’s gains—it was a pretty spectacular achievement.” “I don’t like talking about seven stocks every day, but they’re still driving the market.”
So far this year, the combined conglomerate — Apple, Microsoft, Google parent Alphabet, Amazon, Tesla, Nvidia and Facebook parent Meta — has accounted for three-quarters of the S&P 500’s gains. It has been a dazzling performance. However, lately, they haven’t been moving shares much.
The Magnificent Seven has lost over $600 billion in market capitalization over the past four weeks. Granted, that’s only a 6 percent drop overall and they’re still collectively worth $10.8 trillion. But for the first time this year, they’ve suffered multiple weeks of declines while each reported higher-than-expected earnings.
Such a pause in their rise may not necessarily be a bad thing for the overall market, given the continued dominance of the Magnificent Seven, which is down more than 4 percent in those same four weeks.
The danger is that a large part of the group’s profit this year has come from expanding multiples, where their share prices are outpacing earnings, leaving them unsustainably priced for completion.
Tesla’s share price has tripled to 60x this year relative to its estimated earnings, while Apple is trading at a multiple of 27, up from 19 in January. Only Amazon has held steady, already up 35x. Even Nvidia, backed by a huge upgrade in its expected profits, now trades at a multiple of 30 to 33 in January.
Nvidia’s performance this week alone prompted investors to be wary. After founder Jensen Huang announced figures on Wednesday that blew away already buoyant expectations, its shares failed to maintain an early record high on Thursday and closed flat on the day.
“Traders react, but investors ponder,” said Steve Sosnik, chief strategist at Interactive Brokers. “There was a quick buying reaction to the news even after the rumor, but after considering it for some time, investors decided not to chase the already high stock too much.”
That sentiment applies to others as well. By the time of its quarterly earnings report earlier this month, shares of Apple were up by a third since January. Even though its figures beat forecasts, shares fell 5 percent on the day amid disappointment over declining sales of iPhones, Macs and iPads, putting additional pressure on its autumn line-up of new products. Top-line sales have barely grown in two years.
Meanwhile, Microsoft fell nearly 4 percent after its earnings report late last month as its guidance failed to impress. Such a miss is a big deal when the stock is trading at 29 times expected earnings, compared to trading at 22 times in January.
“They need real consolidation on these multiples. A few months won’t be enough, they probably need six to 12 months,” O’Rourke said.
If not for the somewhat tired looking Seven, then the market will need one more stimulus. It couldn’t be easier to find. Overall, this earnings season has not inspired investors. S&P 500 companies managed to beat top-line revenue forecasts by 2 percent and bottom-line profit bets by 7 percent, according to Barclays’ calculations. Yet, according to Credit Suisse, those that exceeded expectations on both measures only gained 1.2 percent, which is less than the 1.7 percent average.
Analysts generally believe that the previous quarter should mark the bottom of the earnings cycle for the broader market. But the economic outlook still remains unclear. Data this week showed orders for durable goods from US factories softened in July and many retailers reported weak earnings. However, some investors are still taking a breather from the tight labor market. American Airlines pilots agreed on Monday to a 21 percent immediate pay raise and new weekly unemployment claims dropped on Thursday.
“Earnings need to hold their side of the bargain here,” said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Co. “Most of the market’s progress this year has come from rising prices, not rising earnings.”