The 2023 stock market rally witnessed a divergence in fortunes among the “Magnificent Seven” tech giants as they navigated through earnings reports, industry narratives, and investor fatigue. According to Interactive Brokers chief strategist Steve Sosnick, these stocks cannot be viewed as a collective entity anymore.
In October, Amazon (AMZN) and Microsoft (MSFT) were the only members of the group to experience gains greater than 1%, with Amazon rising 4.7% and Microsoft rising 7.1%. Both companies reported quarterly results that surpassed investor forecasts, particularly in their cloud units.
On the other hand, Alphabet (GOOG, GOOGL) saw a decline of over 5% in its shares due to disappointing results from its cloud business. Nvidia (NVDA) also lost 6% following reports that the Biden administration might restrict AI chip exports to China.
Tesla (TSLA) faced a significant setback with its stock falling nearly 20% after reporting weaker than expected profits. Concerns about the adoption rate of electric vehicles (EVs) contributed to the decline.
Meta Platforms (META) issued guidance for the fourth quarter that fell below expectations. However, the stock ended the month relatively flat with a 0.4% increase. Apple (AAPL) registered a similar lackluster performance, falling 0.3% following an over 8% drop in September. Apple is set to release its quarterly results on Thursday.
Valuations under scrutiny
The diverging fortunes of these tech giants reflect broader themes impacting stocks during this earnings season. The expectation for AI benefits has shifted, and while Microsoft and Amazon surpassed this test, Alphabet’s stock was seen as having excessive AI benefit priced in, according to tech analyst Brent Thill from Jefferies.
Tesla, often associated with AI due to its self-driving ambitions, faced other near-term concerns such as slimming margins and the anticipation of its Cybertruck launch.
The focus on the Magnificent Seven highlights the increased scrutiny on corporate results during this earnings season, coupled with the Federal Reserve’s outlook on interest rates. Despite the risks associated with these expensive stocks, investors have highlighted the impact their valuation has on the overall market.
‘There’s still a lot lacking’
Investors have consistently referenced data showing that the majority of the S&P 500’s gains this year were driven by the Magnificent Seven, which account for about 30% of the index’s market cap. However, this momentum can also lead to reversals.
As Jim Bianco, president of Bianco Research, highlighted, the Magnificent Seven contributed to the decline in the S&P 500 from its mid-summer highs. The outsized weighting of these stocks in the index means that index investors will be directly impacted by their performance, according to Charles Schwab chief markets strategist Liz Ann Sonders.
However, a “healthier” market rally should not solely rely on these few winners, as emphasized by Sonders and other Wall Street strategists. Sonders views a broader market rally with improved breadth as a positive sign, although this trend has yet to fully materialize.
The Russell 2000 recently hit its lowest level since October 2022, and financials (XLF) have declined by over 5% this year. Even better-than-expected earnings results have not significantly influenced market movements.
Sonders pointed out that a deeper analysis of the largest stocks reveals missing links in the market’s performance over the past year. As the Magnificent Seven’s influence wanes, attention will shift to the sectors that may have been left behind during the 2023 rally, and the question arises as to which of these areas are best positioned to recover.
Josh Schafer is a reporter for Yahoo Finance.
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