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Mega-cap technology stocks are once again taking control of the U.S. stock market as the S&P 500 index continues to hit record highs, defying Wall Street’s hopes for a broader rally.
Since the beginning of 2024, the so-called Magnificent Seven’s market capitalization has increased by a combined $540.7 billion, compared to the S&P 500 SPX’s total market capitalization increase of $802.5 billion through Tuesday’s close, according to Dow Jones Market Data. It became a dollar. Some of the group’s members include flying artificial intelligence darling Nvidia Inc. NVDA.
Their stock price rose more than 25%.
By comparison, the Magnificent Seven added a total of $5.117 trillion in market capitalization in 2023, while the S&P 500 added $6.502 trillion, according to Dow Jones Market Data. Nvidia, the best performing among an elite group of tech stocks, rose nearly 240% last year, according to FactSet data.
Once again in the new year, Nvidia and Microsoft Corp. MSFT
Both companies have garnered much of the investor interest in artificial intelligence, and both companies are seen by strategists and portfolio managers as the de facto leaders of the AI boom.
Both stocks were on track to close at record highs on Wednesday, with Microsoft briefly having a market capitalization of more than $3 trillion for the first time. Meanwhile, Nvidia was scheduled to close Wednesday with a market capitalization above $1.5 trillion for the first time.
But while other sectors of the market have struggled to sustain their late gains, small-cap stocks and other undervalued corners of the market briefly caught up late last year. Why has Big Tech made such a sustained comeback after a period of stagnation? -What is the profit in 2023?
Several portfolio managers and market strategists interviewed by MarketWatch for this article shared similar explanations.
Jay Hatfield, CEO and portfolio manager at Infrastructure Capital Advisors, said investors are betting on higher interest rates or moving aggressively toward lower rates, as they have recently. Big Tech stocks tend to outperform when investors are reconsidering their expectations.
“There’s an urban myth that tech stocks are more sensitive to interest rates than other stocks, but that’s not actually the case,” Hatfield said.
This ability to outperform despite rising interest rates stems from Big Tech companies’ low debt levels, stable cash flows, and above-trend earnings growth.
“Rising interest rates will not raise the cost of capital and derail growth expectations as these companies are growing faster than most economies,” said Rob Howarth, senior investment strategy director at U.S. Bank Wealth Management. Not at all,” he said.
Still, Nvidia’s additional 25% rally since early January surprised many on Wall Street, especially small-cap and unprofitable technology stocks, which were among the biggest beneficiaries in the fourth quarter. Those who expected a rotation that prioritized – Quarter Rally.
But while the Magnificent Seven once again dominate the league table, Hatfield pointed out that the situation in the new year is not an accurate reflection of what happened in 2023.
For example, two members of the group fell significantly behind in the new year. Tesla Inc. TSLA,
The company, which releases earnings after the bell on Wednesday, has lagged its large-cap peers, declining 16% year-to-date through Wednesday’s close, according to FactSet data.
Tesla’s slump and Apple’s AAPL’s poor performance,
Mr. Hatfield et al.
Alphabet Inc. GOOGL,
Google,
and Meta Platforms Inc. META,
— which probably makes more sense than “The Magnificent Seven” at this point.
Perhaps for investors, these five stocks, plus Broadcom Inc., AVGO,
and Advanced Micro Devices Inc. AMD,
Hatfield added that they then group them into baskets that are more focused on AI themes.
“I think the real story is not just Mag 7, it’s artificial intelligence,” Hatfield told MarketWatch. “And it’s in the cloud and chips that the AI boom is unfolding.”
Hatfield attributes these stocks’ return to market leadership status largely as a result of investors reconsidering their expectations for aggressive interest rate cuts in the coming months.
While small-cap stocks need low interest rates and a high-growth environment to thrive, mega-cap tech companies are well-positioned to thrive in any environment.
And while valuations are certainly an issue for Big Tech companies, neither Hatfield nor Howarth believe these stocks are overvalued at current levels.
In fact, as Howarth pointed out, the forward price-to-earnings ratio (P/E) of the Nasdaq 100 NDX, which has the highest weighting of mega-cap tech stocks among major U.S. indexes, is currently around 25. This is far below 30. , the index traded back in 2020.
Invesco QQQ Trust Series 1 QQQ,
The ETF tracking the Nasdaq 100 closed up 0.6% on Wednesday at $425.83 per share.
Few mega-tech companies have yet to report their earnings for the final three months of 2023, but semiconductor stocks such as Nvidia are poised by strong guidance and rosy numbers shared by Taiwan Semiconductor Manufacturing Company TSM. It’s backed up.
The world’s largest contract chip maker reported its financial results earlier this month.
Still, few expect the S&P 500 to keep rising forever without expanding its gains at some point. Hatfield said he expects broader participation if the Fed starts lowering rates later this year.
To be sure, there are still skeptics who think the market’s over-reliance on a handful of technology names could spell trouble in the not-too-distant future.
Barry Bannister, a longtime market strategist at Stifel, said in emailed comments to MarketWatch that in 1929, 1972 and 1999 there were narrow, growth-driven markets that eventually He also pointed out that the crashes of 1930, 1973, and 2000 ended badly.
“What seemed like a good idea at the time ended up being a tearjerker for investors,” Bannister said.
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