The US stock market has experienced an impressive surge in 2023, defying expectations.
Leading the way in this ascent are the so-called “Magnificent Seven” of technology stocks: Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, and Tesla.
The tech-heavy Nasdaq 100 has seen a remarkable 37% increase since January, while the S&P 500 has jumped by 20%.
Even if you don’t directly hold stocks in the Magnificent Seven, chances are you’re not just a bystander in this action. Many popular funds like F&C and Fundsmith have substantial stakes in these industry titans.
This suggests that it’s worth considering whether you want to remain an observer or position yourself in anticipation of a shift in sentiment. The Nasdaq is currently trading at approximately 25 times the estimated earnings of its constituent companies, which is higher than its ten-year average of about 21.
Despite the unease caused by the recent downgrading of US government debt by Fitch Ratings agency, some experts predict further gains in the market.
John Stoltzfus, from Oppenheimer Asset Management, believes the S&P could rise by an additional 7% to 4,900 by Christmas. Even Michael Wilson from Morgan Stanley, known for his pessimistic stance, sees potential for further upside, suggesting a possible repeat performance of 2019 when the S&P 500 gained 30%.
This optimism stems from the belief that there are unlikely to be many more interest rate rises and the excitement surrounding the practical applications of generative AI.
It may be tempting to join in the party now and bet on the Magnificent Seven continuing their success, especially since we are increasingly dependent on their products and services in every aspect of our lives.
Ian Mortimer and Matthew Page, managers of the Guinness Global Innovators Fund, argue that these “high-quality” businesses have distinct advantages that ensure their long-term growth. They have strong free cash flow that helps them invest in growth and innovation, along with high barriers to entry that protect their market share.
Rising: Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia and Tesla have been the leading players in the ascent of the indices
Given these attributes, it seems wise to continue holding shares in the Magnificent Seven. However, buying at these levels comes with considerable risk, as the valuation of shares at the center of the AI industrial revolution comes under scrutiny.
Stuart Gray from Alliance Trust suggests caution: “We have significant positions in Alphabet, Amazon, and Microsoft, but these decisions are based on careful analysis of their individual prospects rather than a collective view on the entire sector’s potential profitability. Past experience shows that sentiment-driven rallies favoring one sector can quickly turn into a market downturn, so it’s sensible not to solely focus on tech stocks.”
Gray recommends looking for “better, cheaper opportunities” instead.
Darius McDermott from Fund Calibre acknowledges that AI will undoubtedly change the world and is a viable long-term theme, but advises caution in the short term.
Guinness from Fidelity argues that potential opportunities may lie in lesser-known areas of technology currently out of the spotlight, such as PCs, smartphones, and memory storage. He believes that these sectors, which have been weak for some time, are set to recover as they have cleared out excess stock and are ready for a sales increase. These areas are also crucial for AI development.
For investors looking for exposure to Advanced Micro Devices (AMD) and a blend of Magnificent Seven and more obscure stocks, investment trusts like Allianz Technology and Polar Capital Technology offer options at discounts to the net value of their assets.
If you’re curious about smaller American companies in fields overlooked during the AI craze of 2023, McDermott suggests considering the T. Rowe Price US Smaller Companies, Schroder US Mid-Cap, and Artemis US Smaller Companies funds.
Artemis invests in Hostess Brands, a snack manufacturer known for comfort foods like the Twinkie sponge cake.
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