Analysis-Wavering ‘Magnificent Seven’ draw bargain-hunters amid U.S. stock sell-off

Nov 1, 2023

By Lewis Krauskopf

NEW YORK (Reuters) – A slide in the shares of the massive U.S. technology and growth companies that have led stocks higher this year is tempting investors hoping for bargains ahead of results from market bellwether Apple.

Surging bond yields and mixed earnings reports have weighed on the so-called Magnificent Seven stocks, which are collectively down an average of about 15% from their 52-week highs, though they all still sit on hefty gains for the year.

As their stock prices have fallen, rich valuations are moderating. The stocks now trade at an average forward price-to-earnings ratio of about 30 times compared with 45 times in mid-June.

Some market participants see an opportunity. Shares of the Magnificent Seven – Apple, Microsoft, Alphabet, Amazon, Nvdia, Meta Plaforms and Tesla – have soared over the last decade, and now many are drawing investors with rock-solid balance sheets that many believe can weather rocky economic times.

“They are the highest quality names out there and, frankly, if we do go into a recession next year … I actually think the Magnificent Seven will hold up better,” said King Lip, chief strategist at Baker Avenue Wealth Management.

Because the Magnificent Seven have a combined weighting of 28% in the S&P 500, their performance holds a large sway over the broader index. The S&P 500 has fallen 9% from its 2023 high reached in late July, though it is still up just over 9% year-to-date.

Lip said his firm owns shares of all seven companies and has recently added to its holdings in some of them.

Others have been buying as well. Tech stocks saw $2 billion of net inflows last week, their largest in about two months, analysts at BofA Global Research said in a report. Data from Vanda Research showed retail investors’ net buys of nine big tech and growth stocks reached 31% of total flows, after being below 30% for most of the month.

Whether the dip buyers are right will hinge in part on the trajectory of Treasury yields, which have risen to 16-year highs on fiscal worries and expectations that the Federal Reserve will need to keep interest rates higher for longer in order to decisively defeat inflation. The Fed will conclude its latest monetary policy meeting on Wednesday.

Higher yields increase the cost of capital for businesses and households, while also making government bonds a more attractive alternative to equities. The 10-year benchmark Treasury yield has risen about 100 basis points since late July as stocks have come under pressure.

Another important test will come on Thursday when Apple, the largest U.S. company by market value, reports results. Shares of several megacap companies have been hit hard by negative reactions to their earnings reports, including those of Google parent Alphabet, Tesla and Meta Platforms, the parent of Facebook and Instagram.

“Unfortunately, because interest rates are high and we have a war in the Middle East, pretty good is just not good enough,” said Jay Hatfield, CEO of InfraCap. “The bar is extraordinarily high to have a real beat.”

Kim Forrest, chief investment officer at Bokeh Capital Partners, which holds Apple shares, said she was looking for insight into the extent of potential saturation of the smartphone market and the willingness of consumers to buy the next iPhone model.

“They are the phone provider of choice for the developed world,” Forrest said, adding: “As goes Apple, so goes the S&P, just because of its weighting.”

Apple’s shares, which alone have a weighting of over 7% in the S&P 500, are up 31% year-to-date.

Some investors are differentiating among the seven. Hatfield prefers Nvidia and Microsoft as companies that have the most leverage to artificial intelligence trends.

Thomas Ognar, senior portfolio manager at Allspring Global, said the Dynamic Growth Equity team’s portfolios at Allspring are overweight Amazon and Meta. Both companies are showing bottom-line benefits from cost controls, while Amazon’s cloud computing business may have already bottomed and Meta is showing improvements in areas such as short-form videos, Ognar said.

As a group, the Magnificent 7 still show common traits that have supported their share outperformance, including being massive collectors of data, Ognar said.

“You can see that they have had some competitive advantages which they have been utilizing and I think have been on display this year, which is why the stocks have done well,” Ognar said.

(Reporting by Lewis Krauskopf; editing by Ira Iosebashvili and Jonathan Oatis)



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