By Adam O'Dell, Banyan Hill Publishing, 2024-08-08
In the long run, Monday's pullback is little more than a blip on the radar.
Stocks are already recovering and investors seem cautiously optimistic about the months ahead.
But Monday also marked a critical turning point for some of the market's top stocks … the so-called “Magnificent Seven.”
If you look at the market reaction following the July 11 CPI report and during this most recent sell-off, you see that investors don't seem to be as interested in those seven Big Tech stocks anymore.
Tech stocks in general are struggling to keep up, along with most other large-cap growth stocks.
Let's zoom in for a closer look at this week's market action, and identify whether this marks a major turning point for America's most popular stocks…
No Longer a Magnificent World for Mega-Cap Stocks
Last year belonged to Magnificent Seven stocks.
Each posted impressive gains, with even the biggest laggard of the bunch delivering twice the return posted by the S&P 500 index:
This surge was all about artificial intelligence (AI).
ChatGPT's release in November 2022 unleashed a tidal wave of demand for next-generation AI gadgets and innovations.
But AI research can be extremely expensive.
And at the time, interest rates and borrowing costs were still too high for many smaller companies to feasibly compete.
Meanwhile, mega-cap tech stocks like Apple Inc. (Nasdaq: APPL) and Microsoft Corp. (Nasdaq: MSFT) can comfortably fund those new developments through existing revenue. They can pour billions into risky AI projects, even if those projects take years to bear fruit. Apple spent 10 years developing its now defunct “AI Car,” for example.
Mag 7 stocks also have the critical advantage of feeling “safe” to the average investor.
These companies are household names and established blue-chip stocks. And with the growing popularity of index investing, many investors ended up buying shares automatically (whether they knew it or not).
Unfortunately, all this continued buying has driven Mag 7 valuations into the stratosphere.
I've repeatedly warned Money & Markets Daily readers about these dangerously high valuations for over a year now, and the problem has only gotten worse.
As recently as this March, Mag 7 valuations were nearly twice as high as the S&P 500 by equal weight:
Magnificent Seven Stock Valuations Remain Sky-High (P/E ratio)
Mag 7 stocks certainly will always carry a premium to reflect their dominance and strong future prospects.
But they don't deserve a price that's twice as high for every dollar they earn. Especially now that interest rates are coming down, opening the door for small-cap stocks to bring on more competition.
So … where do we go from here?
Is a crash or correction inevitable for the Magnificent Seven?
From Market Darlings to “Dead Money”
Tech stocks already seem to be on the rebound.
But Magnificent Seven stocks will likely be “dead money” for the foreseeable future.
That means we won't see a protracted crash that drives each stock 15 to 20% lower from here.
But we also won't see a “V-shaped” recovery that sends AAPL and MSFT to new highs over the next few weeks.
Instead, you can expect volatile range trading for the Mag 7 in the months ahead.
With valuations still quite high, traders will look to these stocks as a great opportunity for profit-taking.
So shares will likely move sideways in the months ahead — unless unexpected bad news drives them lower.
Personally, I wouldn't want to be caught in a leveraged position in any of the Magnificent Seven stocks right now.
To good profits,
Chief Investment Strategist, Money & Markets
