"Magnificent 7" Top of the Market?

[Thelilyinvestor]

When CNBC starts giving names to a group of companies because their prices just keep going up is sometimes a great indicator of a top.

 

The new term is the "Magnificent 7". Microsoft, Alphabet, Meta, Amazon, Tesla, Nvidia and Apple.

 

I believe Tesla, Nvidia are completely overvalued. Microsoft, Alphabet, Meta and Apple towards expensive. Amazon might be fairly valued in my opinion. 

 

Are they a leading indicator to the rest of the market? Or just some AI hype?

 

I open this thread, which I think might be interesting.

 

Lily

[Xerxes]

I prefer the original from Akira Kurosawa

 

[Spekulatius]

Most of them die, I know that much.

[Gregmal]

Sinister 7

[james22]

FAANG worked pretty well for over a decade.

[Parsad]

23 minutes ago, Spekulatius said:

Most of them die, I know that much.

 

This Magnificent Seven won't die, but probably will get beaten up!    Cheers!

[brobro777]

Boy look at all them Trillions. What they think, trillions grow on trees?

 

[CorpRaider]

1 hour ago, Spekulatius said:

Most of them die, I know that much.

LOL

[Spekulatius]

1 hour ago, Parsad said:

 

This Magnificent Seven won't die, but probably will get beaten up!    Cheers!

Before they die, the hero's get beaten up.

[Dinar]

@Xerxes, while I love it, Rashomon and Dersu Uzala are better in my opinion.

[UK]

https://www.investing.com/news/economy/investors-brace-for-earnings-from-magnificent-seven-us-growth-giants-3126294

 

BofA Global Research projects they will increase earnings by an average of 19% over the next 12 months, more than double the an 8% estimated rise for the rest of the S&P 500.

 

They will need strong results to justify premium valuations. Those companies trade at an overall trailing price-to-earnings ratio of about 40 times, versus 15 times for the S&P 500 excluding those companies, according to BofA.

 

Their results may be crucial to the market as a whole. Fueled by their recent gains, megacap stocks have climbed to dominate benchmark indexes, causing headaches for some managers of active funds. In the S&P 500, the seven stocks comprise 27.9% of the index's weight.

 

“It’s also how do these big companies, which are carrying the market ... guide for the rest of the year and into 2024,” he said.

 

Overall, the seven companies account for 14.3% of overall S&P 500 estimated earnings for the second quarter, and 9.3% of estimated revenue, according to Tajinder Dhillon, senior research analyst at Refinitiv.

 

But many investors say the corporate giants are nevertheless here to stay as critical holdings. Yung-Yu Ma, chief investment officer at BMO Wealth Management said that while “there is a lot priced in” to megacaps’ valuations, that did not mean they are overvalued.

 

"If you think about the megacaps broadly ... they have gone from a core holding of a portfolio to an almost absolute necessary major component of the portfolio once you factor in trends such as AI," he said.

 

[thowed]

14 hours ago, james22 said:

FAANG worked pretty well for over a decade.

 

Absolutely, but how long did the Nifty Fifty work for?  You can still overpay for great companies.  But timing, I have no idea.

[mattee2264]

BoA did a more nuanced report which makes good reading. They suggest investors need to consider 5 questions

 

1 ) What caused the market concentration?

(ultra-low rates and a lacklustre economy in 2010s combined with indexing and pandemic-driven tech adoption with AI the latest boost)

 

2) Has this happened before and how did it end?

(bubbles fuelled by excessive leverage, democratization or markets and rampant speculation tend to end badly)

 

3) is today's Big Tech different from prior bubbles?

(yes. bigger might be better today versus 2000. Big Tech has $200b net cash versus SMID Tech had net debt. For AI scale matters)

 

4) What are the important catalysts to watch for?

  -saturation in ownership (more overweight the stock the more acute the selling pressure around negative surprises) 

-changing competitve landscape (tech trends can shift quickly)

-policy/politics (regulation)

-rate risk (higher real interest rates may hurt growth stocks )

-demand (pull forward in tech capex during COVID similar to that ahead of Y2K which was followed by sequential years of negative top line growth)

 

5) How can equity investors navigate these risks?

(seek opportunities outside Mag 7)

[Xerxes]

13 hours ago, Dinar said:

@Xerxes, while I love it, Rashomon and Dersu Uzala are better in my opinion.

Somewhere very deep in my long term memory there is a trace of Rashomon. It does ring a bell. 

[james22]

8 hours ago, thowed said:

 

Absolutely, but how long did the Nifty Fifty work for?  You can still overpay for great companies.  But timing, I have no idea.

 

Investor Howard Marks reports that about half of the Nifty Fifty "compiled respectable returns for 25 years, even when measured from their pre-crash highs, suggesting that very high valuations can be fundamentally justified."

 

On the other hand, Professor Jeremy Siegel analyzed the Nifty Fifty era in his book Stocks for the Long Run, and determined companies that routinely sold for P/E ratios above 50 consistently performed worse than the broader market (as measured by the S&P 500) in the next 25 years, with only a few exceptions.

 

Wiki

[Haryana]

Just to avoid any confusion and my apologies in advance for butting-in,
the term nifty50 is also used for a major index of India's main market.

https://www.marketwatch.com/investing/index/nifty50

 

"It is the world's largest derivatives exchange by number of contracts traded[a] and the third largest in cash equities by number of trades[b] for the calendar year 2022.[4] It is one of the largest stock exchanges in the world by market capitalization.[2] NSE's flagship index, the NIFTY 50, a 50 stock index is used extensively by investors in India and around the world as a barometer of the Indian capital market."
https://en.wikipedia.org/wiki/National_Stock_Exchange_of_India

 

[Spekulatius]

3 hours ago, james22 said:

 

Investor Howard Marks reports that about half of the Nifty Fifty "compiled respectable returns for 25 years, even when measured from their pre-crash highs, suggesting that very high valuations can be fundamentally justified."

 

On the other hand, Professor Jeremy Siegel analyzed the Nifty Fifty era in his book Stocks for the Long Run, and determined companies that routinely sold for P/E ratios above 50 consistently performed worse than the broader market (as measured by the S&P 500) in the next 25 years, with only a few exceptions.

 

Wiki

On the Nifty fifty, most of the best performing Nifty 50 stocks weren’t WLK that expensive. The best performing one was OM which had a Peof 24 cvs the market multiple of 20. Many others  weren’t nit that expensive either. Some of the most expensive one were tech companies back then like Polaroid (90x+ PE and Digital equipment ~60x) which didn't last ironically.

 

So on a way, even the Nifty Fifty show that price paid matters some what but of course the mist important factor is durability.

 

[backtothebeach]

7 minutes ago, Spekulatius said:

On the Nifty fifty, most of the best performing Nifty 50 stocks weren’t WLK that expensive. The best performing one was OM which had a Peof 24 cvs the market multiple of 20. Many others  weren’t nit that expensive either. Some of the most expensive one were tech companies back then like Polaroid (90x+ PE and Digital equipment ~60x) which didn't last ironically.

 

So on a way, even the Nifty Fifty show that price paid matters some what but of course the mist important factor is durability.

 

Did you have a few drinks before dictating this? Haha

[Gregmal]

Yea idk but it’s seemingly getting harder and harder for folks to deny that there is no secret or magic; just buy quality shit and stop trying to be a know it all in absolute terms with respect to the valuation.

 

One man’s PE is forward, the others is trailing, and another’s is 3 years out. Markets over the long haul, tend to be reasonably accurate. Short term you can get weird opportunities and pockets of dislocation, long term once in a very rare while. But we ve seen plenty of the choruses of “too rich” around stuff like Costco or Amazon for decades now. Maybe it’s time to give less weight to the variables that don’t yield results??
 

If something trades for a certain multiple for an extended period of time, barring total fraud, chances are, that’s generally where it should be trading. Not where your outdated textbook says it should. 

[Spekulatius]

3 hours ago, backtothebeach said:

 

Did you have a few drinks before dictating this? Haha

Sure looks like it. Typed it on my iPad and this thing has a way of twisting my words.

[valueventures]

What do people see as the most sustainable of the Mag 7 (i.e., likely to remain in an advantaged position over the longest period of time)?

 

I'd rank as follows: Tier 1: AMZN, GOOG, MSFT, Tier 2: META, AAPL, and Tier 3: NVDA. I wouldn't even rank Tesla since I don't think it is of the same caliber as the others. I could see NVDA being more Tier 2 (I think they are more innovative than people give them credit for...the bear case is that they're a "one-tricky pony" benefiting from a one-time demand surge). I could also see AAPL being more Tier 3 (given the lack of growth / innovation in recent years and resulting need for financial engineering). My biggest concern with META is consumer fad risk...where would they be if they hadn't pulled a rabbit out of their hat to acquire Instagram?

 

[WayWardCloud]

Microsoft, Meta, Alphabet, Amazon, Apple, Nvidia, Tesla

[mattee2264]

Approaching $10TR market cap for Apple + Microsoft + Nvidia. 

 

https://www.morningstar.com/news/marketwatch/20240614265/the-sp-500-would-be-nearly-20-lower-without-ai-mania-says-bespoke

Article above reckons S&P 500 would be about 20% lower without the AI mania which sounds about right.

 

What you are also seeing is ridiculous volumes of call option activity on these three stocks. So even allowing for the quality of these stocks with their monopolies, competitive advantages etc. there is a lot of speculative demand for their stocks and if this evaporates when momentum reverses then there could be a long way down. 

[Xerxes]