megacap tech stocks: Big tech face high bar to sustain gains

The Magnificent Seven group of megacap tech stocks need to deliver stellar earnings to keep outperforming the broader market, according to a growing consensus on Wall Street.

The group – comprised of Apple Inc., Microsoft Corp., Nvidia Corp., Alphabet Inc., Inc., Meta Platforms Inc. and Tesla Inc. – doubled in value in 2023, outperforming the broader Nasdaq 100 Index’s 54% rise. The majority extended gains this year – with the exception of Tesla and Apple.

Optimism about a stronger-than-expected economy, peaking interest rates and artificial intelligence have helped bolster the stocks. Investors are now questioning if gains can be sustained through 2024 and if the grouping of seven will remain intact as their performances differentiate. Tesla has dropped 24% this year, while Meta is up 34%.

The Facebook parent on Friday saw the biggest single-session market value gain in history. “As the Dot Com boom showed, continued outperformance requires stocks to exceed the high bar set by consensus,” a Goldman Sachs Group Inc. team led by David Kostin said. “The “fate of the magnificent 7 stocks depends on their ability to deliver rapid revenue growth in 2024,” he wrote.

The strategists noted a wide dispersion of consensus growth estimates across the group. That’s highlighted by varying degrees of revenue expectations for this year. While Nvidia’s revenue is expected to soar 119% from a year prior, Alphabet’s is seen dropping 7%, according to data compiled by Bloomberg.

Others suggest a more selective approach to Magnificent Seven allocation. Berenberg strategists prefer to be exposed to some of these stocks, but not all of them, especially as the US technology sectors’ valuations are lofty versus global peers, providing a sell signal.”Overall, the Mag7 group retains earnings momentum leadership relative to the S&P 493,” they wrote in a note. “The group needs to maintain this momentum to outperform again in 2024.” The reporting season has been mixed. Meta and Amazon delivered quarterly earnings and outlooks that far exceeded Wall Street’s expectations. Microsoft posted its strongest revenue growth since 2022. Apple returned to revenue growth but demand in China was weaker than feared. Tesla’s recent performance meanwhile has stoked debate as to whether it can maintain its place in the group, amid warnings of plunging demand for EVs and the impact of price cuts on margins. Nvidia is expected to report later this month.

There are concerns about the increasing dominance of a small number of stocks. JPMorgan Chase & Co. quantitative strategists last week noted this is drawing similarities with the dot-com bubble, raising the risk of a selloff. The likelihood of broader index outperforming top ten stocks in near future is becoming increasingly likely, they said.

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