By Lewis Krauskopf
NEW YORK (Reuters) – A handful of huge growth and technology names that have dominated the US stock market in 2023 will report gains in the coming weeks, possibly setting the path for this year’s equity rally.
Recently dubbed the “Magnificent Seven” by investors, shares of the US companies with the largest market values have risen between 40% and more than 200% so far this year. Those moves accounted for the lion’s share of the S&P 500’s 17% gain since the start of the year and propelled the index to its highest level since April 2022.
The outrageous profits have been accompanied by high profit expectations for the seven companies: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms. Earnings will grow an average of 19% over the next 12 months, more than double the estimated 8% increase for the rest of the S&P 500, according to BofA Global Research.
They will need strong results to justify premium valuations. Those companies trade at an overall underperforming P/E ratio of about 40 times, versus 15 times for the S&P 500 excluding those companies, according to BofA.
Their results can be crucial for the market as a whole. Fueled by their recent gains, megacap stocks have climbed to dominate benchmark indices, giving some active fund managers a headache. In the S&P 500, the seven stocks make up 27.9% of the weight of the index.
Investors will look beyond second-quarter results, said Bill Callahan, investment strategist at Schroders.
“It’s also how these big companies, which carry the market … guide for the rest of the year and through 2024,” he said.
In total, the seven companies account for 14.3% of total S&P 500 estimated earnings for the second quarter and 9.3% of estimated revenue, according to Tajinder Dhillon, senior research analyst at Refinitiv.
Of the reports in the previous quarter, Nvidia was one of the standouts. The semiconductor company’s revenue forecast beat estimates as it said it was increasing supply to meet rising demand for its artificial intelligence chips, further fueling market excitement over AI. Nvidia shares are up more than 200% this year
Tesla is the first of the growth giants to report, with earnings expected Wednesday. The Elon Musk-led company said this month that it delivered a record number of vehicles in the second quarter.
Microsoft and Meta are among the companies to report next week, and investors are expected to focus on how companies are trying to leverage AI.
While the AI benefits may not materialize immediately for every company, investors are eager to “learn more about how they’re going to essentially monetize that,” said Thomas Martin, senior portfolio manager at Globalt Investments.
“It’s going to take some time for that to work its way out and become visible,” said Martin, who is overweight in some of the megacap stocks. “Along the way, people are going to want to see some kind of progress.”
There are signs that market gains are going beyond the mega caps. The equal-weight S&P 500, a measure of average stock, modestly beat the S&P 500 over the past month — up 3.6% versus about 3% for its counterpart. The equal weight version lagged badly for most of 2023. Strong US data has raised confidence that the economy can avoid a long-feared recession. A so-called “soft landing” could boost cyclical stocks such as industrials and small caps, which trade at lower valuations. But many investors say the corporate giants are nonetheless here to stay as critical holdings. Yung-Yu Ma, chief investment officer at BMO Wealth Management, said that while “a lot has been priced in” in megacap valuations, it doesn’t mean they are overvalued.
“If you think about the mega-caps in general…they have evolved from being a core asset of a portfolio to an almost absolutely necessary important part of the portfolio once you factor in trends like AI,” he said.
(Reporting by Lewis Krauskopf; editing by Ira Iosebashvili and David Gregorio)