The seven largest stocks in the S&P 500 are igniting a remarkable rally, delivering a combined 92% return.
Expectations that the Magnificent 7 global technology companies will increase earnings due to the use of artificial intelligence are very significant to U.S. stock investors.
Due to their disproportionate weight in the index, the so-called 'Magnificent Seven' stocks—Apple Inc. (AAPL), Microsoft Corporation (MSFT), Alphabet Inc. (GOOGL), Amazon.com, Inc. (AMZN), NVIDIA Corporation (NVDA), Tesla, Inc. (TSLA), and Meta Platforms, Inc. (META)—have experienced significant rallies that have driven nearly all of the S&P 500's 12% year-over-year gain. The remaining 493 companies, on the other hand, have only grown by 5%, indicating a markedly unbalanced market.
This quarter, the AI-driven stock market boom was starting to weaken until Nvidia Corp.'s spectacular earnings reestablished the market. Early in September, Nvidia's stock price was close to all-time highs as data centre operators stocked up on the company's processors to handle the intensive workloads demanded by AI.
The S&P 500 is up around 12.5% in 2023, which is a notable recovery from the lows of 2022. Although this performance is excellent, recent research by stock market experts highlighted some rally-related concerns.
The Magnificent 7 Total Returns Index has surged by 93% in 2023, thanks to record earnings, and valuations are in line with their five-year averages.
Among the notable companies, Amazon, Tesla, Nvidia, and Alphabet all have price-to-forward-earnings ratios that are below their five-year averages when compared to the performance and values of the Magnificent 7 index. After experiencing a record-breaking stock decline last year, Meta is now back on track. Notably, Nvidia's stock is trading at a level two standard deviations below its typical valuation, as indicated by PEG ratios, while Microsoft is trading one standard deviation below. PEG ratios take long-term earnings growth projections into account.
The US economy is still expanding, and the S&P 500 index, which gauges the performance of US blue-chip stocks and serves as a benchmark for investors worldwide, has increased by more than 14% this year.
Since the 1970s, the S&P 500 index's performance has never been more concentrated. Seven of the largest components have surged higher this year, increasing by between 40% and 180%: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta. Overall, the remaining 493 companies are stable. The index is completely dominated by large tech corporations. Almost a quarter of the market capitalization of the entire index is comprised of just five of those seven stocks. Apple alone is valued at $2.9 trillion, which is more than the top 100 UK-listed companies combined.
The chipmaker Nvidia has increased its market capitalization by $640 billion just this year by riding the wave of investor interest in artificial intelligence and ripping up its own revenue guidance for the upcoming quarters in favour of more optimistic predictions. The combined market value of the two largest US banks, JPMorgan and Bank of America, is virtually equal to that amount.
Sameer Samana, senior global market analyst at the Wells Fargo Investment Institute (WFII), said of the Magnificent Seven, "Everybody knows these individuals are going to make money." The only question is: How fast is that earnings growth, and have investors overpaid for it?"
In June, the Wells Fargo Investment Institute lowered the rating of the technology industry, which includes Apple, Microsoft, and Nvidia, to "neutral" from "favourable."
Results from Microsoft, Alphabet, Amazon, and Meta, the parent company of Facebook, are anticipated for the next week, while Apple and Nvidia will publish their results the following month.
Tajinder Dhillon, senior research analyst at LSEG, predicts that the S&P 500 as a whole will experience a 2.3% fall in 2023, compared to a 32.8% profit increase for the megacap businesses.
The steady rise in interest rates and Treasury yields, which has been fueled by a combination of Federal Reserve hawkishness in the face of a robust economy and concerns over the U.S. fiscal picture, complicates the outlook.
More positive is Goldman Sachs. This month, it raised its prediction for the S&P 500's end-of-year level, predicting that it would hit 4,500, a rise of 12.5% from its prior prediction and roughly 3% higher than where it was on Wednesday afternoon. If the bank is correct, this will be one of the index's best years in the past 20 years.
Investors attention will be focused on big tech earnings in the upcoming week as Amazon (AMZN), Alphabet (GOOGL), Meta (META), and Microsoft (MSFT) are scheduled to release their earnings reports.
Earnings Date: 24 October, 2023 (Tuesday)
Earnings Date: 24 October, 2023 (Tuesday)
Earnings Date: 25 October, 2023 (Wednesday)
Earnings Date: 26 October, 2023 (Thursday)
Apple's Q3 earnings report beats the street's estimates on revenue and earnings per share.
Apple Inc. (AAPL) reported fiscal third-quarter earnings on Thursday, beating Wall Street estimates with $83 billion in revenue, confirming robust iPhone demand and pointing to record services revenue while admitting it couldn't build enough Macs or iPads to meet demand.
Apple's stock increased more than 2.6% to around 162. In Thursday's regular session, Apple shares rose 0.4 percent to settle at 157.35.
Wall Street had been prepared for a disappointing report from Apple, given the industrywide decline in personal computer and smartphone sales.
Apple reported adjusted earnings per share of $1.20 in the third quarter, above analyst estimates of $1.16.
Apple's entire revenue in the third quarter of 2022 was $83 billion, which is also above analysts' estimates of $82.81 billion, with revenue increasing by 2% year on year. Apple's revenue increased by 2% during the quarter, compared to 36% growth in the same period last year and more than 8% growth in the March quarter. Cook stated that the results were better than expected, while CFO Luca Maestri stated that the operating climate was "difficult."
Apple did not issue formal quarterly guidance. Analysts predicted that the company would report fourth-quarter profits per share of $1.31 and sales of roughly $90 billion.
"Despite the adverse operating climate, our June quarter results demonstrated our ability to run our business successfully." Apple CFO Luca Maestri stated in a statement, "We established a June quarter sales record, and our installed base of active devices hit an all-time high in every geographic group and product category."
Apple's iPhone sales increased 3% to $40.67 billion, exceeding Wall Street's expectation of $38.9 billion. Smartphones accounted for 49 percent of the company's total sales.
Apple's iPhone sales were above Wall Street projections, indicating that demand for iPhone 13 models remains robust even as the device enters the second part of its annual release cycle. Apple usually launches new iPhones in September, and sales plummet as people wait for new models.
"We had a record number of switchers and had double-digit growth for consumers new to the iPhone," Cook added.
In the fiscal third quarter, Apple's services revenue increased 12 percent to $19.6 billion. The App Store, AppleCare, iCloud, Apple Pay, Apple Music, Apple TV+, Apple Arcade, and more services are available. Services revenue increased from $17.5 billion in Q3 last year to $19.6 billion in Q3.
During the quarter, Apple's services division grew at the fastest rate. It includes monthly subscriptions, payment fees, warranties, Google search licence fees, and iPhone App Store earnings. Apple now has 860 million paid subscribers, which includes everyone who subscribes to an app offered on the Apple App Store as well as items such as Apple Music and iCloud.
Apple's Mac computer sales fell 10% to $7.38 billion. In addition, iPad tablet sales fell 2% to $7.22 billion.
Mac sales fell short of consensus projections and plummeted more than 10% year-on-year. Cook attributed this to supply restrictions and a strong currency.
Apple's iPad fell 2% year on year but topped moderate Wall Street predictions of $6.9 billion, as experts predicted that Apple would move away from iPad tablets in the face of a processor shortage. According to Cook, the iPad's drop was also influenced by supply restrictions and a strong currency.
Apple's other goods category, which includes AirPods, Apple Watches, HomePod speakers, and accessories divisions, fell more than 8% year on year to $8.08 billion, falling short of Wall Street estimates.
Apple's gross margin topped the company's own April prediction. Apple's gross margin was 43.26 percent, higher than Wall Street's prediction of 42.61 percent. Apple spent more than $28 billion on share buybacks and dividends during the quarter.
Apple is largely expected to release the iPhone 14 and Apple Watch Series 8 later this fall. While this won't have much of an influence on the company's Q4 profitability because the goods were introduced only a few weeks before the end of the quarter, it should improve its Q1 2023 results.
However, Morgan Stanley believes that this is only a short-term problem for Apple. According to Erik W. Woodring in a note, Apple's services division might help bring the tech titan's market worth back beyond $3 trillion.
Apple is planning to join the AR/VR industry with its own headgear, which will most likely be available in 2023. This might be the company's next significant product, opening up new prospects for service and content sales.