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)
Microsoft Q4 earnings report.
On Tuesday, Microsoft (MSFT) released fiscal Q4 earnings, falling short of analyst estimates. The company's shares jumped 5% in extended trading on Tuesday as the software company provided a bullish earnings estimate for the year ahead, despite reporting quarterly results that fell short of Wall Street expectations.
Microsoft announced adjusted earnings per share of $2.23 in the fourth quarter, which was slightly below analyst’s estimates of $2.29.
For the first time since 2016, the company's earnings per share fell short of the consensus. However, the company's net income remained relatively steady at $16.7 billion, with only a 2% rise.
Microsoft's entire revenue in the fourth quarter was $51.87 billion, falling short of analyst’s estimates of $52.44 billion which is up 12% year-on-year. Despite the failure in the company's Intelligent Cloud division, Microsoft stated revenue from Azure and other cloud services was up 40% year on year.
The company claimed a variety of circumstances that impacted its financial results, including the Ukraine conflict, an adverse foreign exchange rate environment, and extended COVID shutdowns in China. Microsoft also observed that advertisers were spending less money, which had an impact on its search business and LinkedIn, the professional network it controls.
Microsoft's Russian businesses were also scaled back, resulting in $126 million in operational expenditures for bad debt charges, asset impairments, and severance.
Microsoft's Intelligent Cloud division earned $20.91 billion in sales, which included the Azure public cloud for application hosting, SQL Server, Windows Server, and corporate services. This was a 20% increase but fell short of analyst’s estimate of $21.10 billion.
Server products and cloud services sales climbed by 22% to $3.4 billion, revenue from Azure and other cloud services increased by 40%, compared to 46% in the previous quarter, according to the business. CNBC polled analysts who projected a 43.1 percent, while StreetAccount's average prediction was 43.4 percent.
Microsoft's Productivity and Business Processes sector generated $16.60 billion in sales, which included Office productivity software, Dynamics, and LinkedIn. This was an increase of approximately 13% and just less than the StreetAccount average of $16.66 billion. The premium E5 tier now accounts for 12% of all business Office 365 subscriptions, up from 8% a year ago. However, she stated that "some deceleration in new deal volume outside of E5, notably in the small and medium company client group," had occurred.
Sales from Office Commercial products and cloud services climbed by 9% to $807 million, while revenue from Office 365 Commercial jumped by 15%. Revenue from Office Commercial Products fell 32%, owing to a sustained client move to cloud-based alternatives.
LinkedIn revenue increased by $768 million, or 26%, while Dynamics CRM product and cloud service sales increased by 19%, led by a 31% increase in cloud-based Dynamics 365.
While Microsoft's other sectors did well this quarter, its personal computing segment underperformed, with sales growing by only 2% to $270 million. The once-thriving PC market has been plagued by issues in the past year, with factory shutdowns contributing to a sharp drop in PC sales.
Xbox content and services revenue dropped 7%, while hardware sales dropped 11%.
Microsoft's earnings come on the heels of the announcement that it will be the technology supplier for Netflix's impending ad-supported membership tier. Needham and Goldman Sachs analysts, however, are wary of the move, with Needham's Laura Martin suggesting that the collaboration is part of a long-term Netflix effort to convince Microsoft to purchase the streaming service.
Microsoft shares are down 23% year to date, closely in line with cloud computing competitor Amazon. The stock price of the Seattle-based technology corporation has dropped by 27%. Meanwhile, the S&P 500 is down 17% year to date.