The so-called Magnificent 7 stocks have been anything but this year, with most of them down or in single-digit return territory year-to-date.
It was inevitable that they would see a correction after two years of scorching hot returns. Their valuations had skyrocketed to unsustainable levels, and they would eventually have to come back to earth a bit.
That said, the past month or so has seen these Magnificent 7 stocks and the tech sector in general come storming back as the trade war has taken a pause. But is it a short-term blip or does the rally have staying power?
Recently, John Flood, head of Americas equities sales trading at Goldman Sachs Global Banking & Markets, offered his team’s take on what could be in store this summer for the Magnificent 7 stocks — Meta (NASDAQ:META), Tesla (NASDAQ:TSLA), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL) (GOOG)), and NVIDIA (NASDAQ:NVDA).
Call It a Comeback
Flood predicts that these stocks are poised to rally this summer, a continuation of the forward momentum they’ve had over the past several weeks. The chief reason? It’s a combination of rising earnings and falling valuations.
“Investors continue to ask if these stocks are overvalued. You even get the word “bubble” thrown around. We see it differently,” Flood said in a video posted on Goldman Sachs’ web site. “These companies just reported outstanding earnings, beating estimates by 13%. With rising earnings and falling stock prices, valuations are becoming much more reasonable. We’ve seen the Mag 7 valuation premium fall dramatically.”
The 13% earnings beat is the biggest since the third quarter of 2023, according to Goldman Sachs.
To Flood’s point, almost all of the Mag 7 stocks have seen their valuations come down, and some are even below the S&P 500 median P/E of 28.
Alphabet stock is downright cheap with a P/E of 18, down from 28 a year ago. Meta is also fairly cheap with a P/E of 26, down from 29 a year ago.
Microsoft and Apple are hovering pretty much around where they were last year in fairly reasonable ranges. Microsoft is trading at 36 times earnings, down from 38, and Apple is trading at 31 times earnings, down from 32.
The two biggest declines in valuation are Amazon, which fell to a P/E of 33, down from 54 a year ago, and NVIDIA. NVIDIA’s P/E ratio is 45, still a bit high, but it is much lower than it was a year ago when it was trading at 72 times earnings.
Then there is Tesla — the one stock among the 7 that has seen its valuation skyrocket, mainly due to a meteoric rise after the election. Tesla has a P/E ratio of 162, up from 50 a year ago.
Mag 7s Will Outperform This Summer
In addition to the mostly lower valuations and high earnings, Flood says the companies should be able to navigate economic uncertainty.
“They are less reliant on economic growth, which means they can become defensive during uncertain times. In the shorter term, positioning is a major tailwind. Mutual funds and hedge funds are underweight these names, which means there is still plenty of dry powder left to add,” Flood said.
Further, Flood says that July is typically a good month for corporate buybacks, so that could be an additional source of alpha for these stocks.
“Put it all together, and I’m looking for the Magnificent 7 to outperform the broader market this summer,” he said.
Currently, Meta has been the best performer among the Mag 7 this year, with a 19% YTD return. Microsoft is next, up 12%, followed by NVIDIA, up 6%.
The rest are in negative territory, with Amazon down 3%, Alphabet off 9%, Apple down 18%, and Tesla falling 26%. Let’s check in in September and see where they are.