NEW YORK: The upcoming earnings reports of several major growth and technology companies could have a significant impact on the trajectory of this year’s equity rally. These companies, collectively known as the “Magnificent Seven,” have experienced remarkable stock market growth in 2023, with share prices rising between 40% and over 200%. Their performance has been a driving force behind the S&P 500’s 17% year-to-date increase. Investors will be closely watching Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta Platforms as they are projected to see earnings rise by an average of 19% over the next 12 months, double the estimated rise for the rest of the S&P 500, according to BofA Global Research.
These companies will need to deliver strong results to justify their premium valuations. The seven companies currently trade at an overall trailing price-to-earnings ratio of about 40 times, compared to 15 times for the S&P 500 excluding these companies. Mega-cap stocks have now come to dominate benchmark indexes, causing challenges for active fund managers. In fact, the seven stocks mentioned earlier comprise 27.9% of the S&P 500’s weight.
Bill Callahan, an investment strategist at Schroders, suggests that investors should look beyond second-quarter results. He highlights the importance of the big companies’ guidance for the rest of the year and into 2024. The seven companies make up 14.3% of the overall estimated earnings for the second quarter and 9.3% of estimated revenue for the S&P 500, according to Tajinder Dhillon, senior research analyst at Refinitiv.
Nvidia stood out in the previous quarter with its impressive revenue forecast, surpassing estimates. The semiconductor company stated that it was increasing supply to meet the high demand for its artificial-intelligence chips. This further fueled the market’s excitement over AI, resulting in Nvidia shares surging over 200% this year. Tesla is the first of the growth giants to report earnings, with expectations set for Wednesday. The electric vehicle company recently announced record vehicle deliveries in the second quarter.
Microsoft and Meta are among the companies scheduled to report the following week. Investors will be closely watching how these companies are leveraging artificial intelligence. Although the benefits of AI may not be immediately apparent for every company, investors are eager to understand how it will translate into financial gains.
There are signs that market gains have started to extend beyond the mega-cap stocks. The equal-weight S&P 500, which represents the average stock, has outperformed the traditional S&P 500 in the past month, demonstrating a 3.6% increase compared to around 3% for its counterpart. The equal-weight version had previously underperformed for most of 2023.
Strong U.S. economic data has instilled confidence that a prolonged recession can be avoided. This “soft-landing” scenario could benefit cyclical stocks such as industrials and small-caps, which are currently trading at more affordable valuations. Nonetheless, many investors believe that mega-cap stocks will remain crucial components of portfolios. Yung-Yu Ma, the chief investment officer at BMO Wealth Management, emphasizes that these companies are essential holdings, particularly when considering trends like AI. While there may be a lot priced into their valuations, it does not necessarily mean they are overvalued.
Credit: The Star : Business Feed
