Microsoft is likely the best-positioned of its Magnificent Seven peers to capitalise on the potential of AI, according to some investors. — Bloomberg
NEW YORK: The soft-landing scenario that investors see for next year points to further gains in US stocks. But it also dims the prospect of another stretch of wild outperformance for the technology giants that dominated in 2023.
One of the key themes behind the Magnificent Seven’s surge, which generated nearly two-thirds of the S&P 500 Index’s advance this year, appears to have faded in importance for investors: With recession fears swirling, the tech behemoths’ earnings growth, combined with robust cash flow and balance sheets, made them haven stocks.
With added fuel from the artificial intelligence or AI boom, the group rose almost 100% through mid-July, compared with roughly 20% for the S&P 500.
But as confidence in the economy grew after the Federal Reserve’s (Fed) July interest-rate hike, which investors now see as the last of this cycle, the tech titans’ gains became more muted.
Since the end of July, the group is up almost 7%, while the broad market has risen around 4%.
There’s still a camp of economists predicting the Fed will trigger a recession as it battles inflation. But for now, investors are embracing the soft-landing view, broadening their horizons to smaller tech stocks and other sectors that had been beaten down for much of 2023.
“The only way they stay the Magnificent Seven is if we have less than a perfect landing,” said Rhys Williams, chief strategist at Spouting Rock Asset Management.
“Still, from a portfolio-construction point of view, I think they’re good hedges, even if they pause for a while.”
Below is a roundup of where the seven largest stocks in the S&P 500 by market value – Apple Inc, Microsoft Corp, Google parent Alphabet Inc, Amazon.com Inc, Nvidia Corp, Tesla Inc and Facebook owner Meta Platforms Inc - stand heading into 2024. Apple
Apple has soared nearly 50% this year to a record, pushing its market value to US$3 trillion, greater than any other company in the world. The bulls say there’s still room to run, in part because of its market-leading position.
“Even though it seems incomprehensible at this moment, I think Apple will continue to grow until there’s a replacement for what they do, and I just don’t see any,” said Kim Forrest, chief investment officer of Bokeh Capital Partners LLC.
Of course, there are obstacles ahead. A recovery in its cyclical iPhone and personal computer sales may not come until the second half of 2024, and its growth also depends on the strength of China’s consumers. Apple has also been slower than other Big Tech peers on AI, a crucial growth area.
Microsoft
Microsoft also set an all-time high this year on optimism over AI and cloud growth as it’s been able to integrate OpenAI’s ChatGPT technology into its products.
It’s likely the best-positioned of its Magnificent Seven peers to capitalise on the potential of AI, according to some investors.
“We think Microsoft is going to be a big winner in this race,” because they’re starting to show how they can monetise the product, said Jamie Meyers, a senior equities analyst at Laffer Tengler Investments.
Amazon
Amazon’s rise since October has left the shares up more than 80% this year. An earnings beat that showed stabilising growth in its AWS cloud unit helped spur the stock.
“Amazon is almost like a late bloomer here,” said Ken Mahoney, president of Mahoney Asset Management.
“But they also have a really great opportunity in AI, especially in the cloud.”
Amazon is well below its 2021 closing high of about US$187 per share, giving investors a sense of the possible upside.
Nvidia
Nvidia earned its title as an AI darling after demand for its chips fuelled booming revenue growth. The stock’s more than 230% rally this year to a record has made it the top performer in both the S&P 500 and the Nasdaq 100.
The market has high hopes for the chipmaker.
In the last year, Wall Street’s estimates for 2025 revenue have surged more than 150%, data compiled by Bloomberg showed. Analysts are overwhelmingly bullish on the stock – more than 90% of those covering it say it’s a buy, and the average price target of US$652 implies a roughly 30% upside.
“Execution is key,” said Hendi Susanto, an analyst at Gabelli Funds.
“There’s a lot of demand right now and the execution has to be solid in order to meet those high expectations.”
Alphabet
Alphabet, which is up more than 60% this year, is perhaps Microsoft’s biggest competition in AI and cloud products at the moment.
Now investors want to see a clear path to higher revenue from its AI offering, Gemini.Trading at about 20 times forward earnings, the Google parent is one of the more reasonably priced stocks in the Magnificent Seven on a valuation basis, and is below its record high.
Meta has a similar valuation, while Tesla, at about 70 times forward earnings, is the priciest. The average for the seven firms is roughly 32.
“Google and Meta are relatively cheaper compared to the rest” of the group, said Williams at Spouting Rock.
Meta platforms
In the era of social media, it’s no surprise that Meta is a high flyer. The company’s shares have nearly tripled in 2023 and it boasts the most bullish skew of Wall Street ratings in its history. Meta’s shares are also below their 2021 high.
“Meta remains our top pick overall” among Internet stocks, Citigroup Inc analysts led by Ron Josey said in a Dec 20 note. “Engagement continues to ramp as Meta benefits from a multi-year product roadmap across social, GenAI, and ad tools as margins expand.”
Tesla
Tesla has had a choppier year than most in the group but has still more than doubled. Though the company looks like the winner in the electric-vehicle race, analysts have soured on it lately, reducing expectations for deliveries and profits as demand cools across the industry.
Still, bulls see Tesla’s leading position and ability to tap trends like AI as a long-term tailwind. This stock, too, is well under its 2021 peak.
“There’s so many different avenues for growth and so many different things they’re working on,” said Meyers at Laffer Tengler Investments. “We just don’t see it slowing down.” — Bloomberg
