Telemus Weekly Market Review February 12th, 2024 - February 16th, 2024
The dominant market story during 2023 was the rally in so called Magnificent Seven stocks. These stocks (Apple, Amazon, Alphabet, Microsoft, Meta, Tesla and Nvidia) presently make up 29% of the S&P 500, and an even more significant 40% of the NASDAQ Composite. Their stellar returns in 2023, combined with their significant influence in these benchmarks, collectively accounted for 92% of the S&P 500’s 2023 return.
As we’ve settled into 2024, the luster associated with these stocks has yet to fade. Collectively this group continues its advance, more notably in the last few weeks. In an environment where there is less certainty around the direction of the economy, government policies and geopolitical tensions, the steady and resilient growth profile of these stocks is an attractive trait for investors.
A compelling feature of these businesses is the strong financial profiles they possess. They generate significant amounts of cash flow. They have modest and manageable debt levels. Furthermore, their profitability levels are the envy of most other businesses. Besides that, the growth trajectory of these companies is quite attractive. Aside from Nvidia, six of the seven companies in the cohort have reported their 2023 yearend financial results. Nvidia reports this coming week. Assuming Nvidia produces results that are in line with current expectations, the Magnificent Seven will have collectively grown their earnings by 48.7% in the past year. That’s a remarkable achievement, particularly for such large and established companies. This growth was driven by expanding profit margins, as collectively the group of seven’s revenue grew by 14.5%.
The Magnificent Seven are expected to continue to outgrow the broader market in the coming quarters. The differential, however, begins to narrow, with current expectations signaling the broader S&P 500 will outgrow the Magnificent Seven by the fourth quarter of 2024. This isn’t all that hard to fathom given that after growing 49%, it’s hard to continue to maintain that pace, especially when you are already a very large company.
As we assess the market and consider various perspectives on these stocks, we see some divergent views taking hold on the Magnificent Seven. No one rebuts the strong business fundamentals they currently possess. Some, such as Apple and Tesla, have more recently indicated a slower growth cadence. Others are priced at outsized valuations, which make some value-oriented investors cringe. The alternative perspective points to the long-term growth potential these businesses have, their ability to expand margins and the optionality their sizable cash balances afford them. Overall, the diverse viewpoints are what makes a market.
Our perspective is these are incredible businesses that have significant optionality. Having exposure to them makes sense. However, one should not overemphasize this narrow cohort. There are competing investment opportunities that offer more attractive valuations, and what may be improving relative growth rates. Thus, having a bit of diversification beyond the seven stocks that seem to keep climbing makes sense to us. At some point, we’ll see some (but maybe not all) of the luster begin to fade a little. Having businesses outside of technology that can still benefit from trends such as renewable energy, implementation of artificial intelligence, or greater healthcare utilization rates will help guide your portfolio beyond the trends that be the emphasis of the market today.
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