By Lewis Krauskopf
NEW YORK (Reuters) – A handful of massive growth and tech names that dominated the U.S. stock market in 2023 are expected to post profits in the coming weeks, potentially determining the course of this year’s rally in stocks.
Lately dubbed the “Magnificent Seven” by investors, shares of the most valuable US companies have soared 40% to more than 200% so far this year. Those moves accounted for the lion’s share of the S&P 500’s 17% year-to-date rise and propelled the index to its highest level since April 2022.
With the outsized gains come high earnings expectations for all seven companies: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms. BofA Global Research expects them to grow revenue by an average of 19% over the next 12 months, more than double the estimated 8% rise for the rest of the S&P 500.
They will need strong results to justify premium valuations. These companies trade at an aggregate price-to-earnings ratio of around 40 times, compared to 15 times for the S&P 500 without these companies, according to BofA.
Their results can be crucial for the market as a whole. Fueled by their recent gains, megacap stocks soared to dominate benchmarks, causing headaches for some active fund managers. In the S&P 500, the seven stocks represent 27.9% of the index’s weight.
Investors will look beyond second-quarter results, said Bill Callahan, investment strategist at Schroders.
“It’s also how these big companies, which are carrying the market… are guiding for the rest of the year and into 2024,” he said.
Together, the seven companies account for 14.3% of the S&P 500’s estimated aggregate second-quarter profit and 9.3% of estimated revenue, according to Tajinder Dhillon, senior research analyst at Refinitiv.
Among the previous quarter’s reports, Nvidia was one of the standouts. The semiconductor company’s revenue forecast beat estimates as it said it was increasing supply to meet growing demand for its artificial intelligence chips, further stoking market enthusiasm for the AI. Nvidia shares are up more than 200% this year
Tesla is the first of the growth giants to report, with profits expected on Wednesday. The Elon Musk-led company said this month it delivered a record number of vehicles in the second quarter.
Microsoft and Meta are among the companies due to report next week, and investors are expected to focus on how the companies are looking to harness AI.
While the benefits of AI won’t immediately materialize for all companies, investors are eager to learn “more about how they’re going to convert this into money, basically,” said portfolio manager Thomas Martin. Principal at Globalt Investments.
“It’s going to take some time for that to materialize and manifest,” said Martin, who is overweight some megacap stocks. “Along the way, people will want to see some kind of progress.”
There are signs that the market gains extend beyond the megacaps. The equal-weighted S&P 500, a proxy for the average stock, slightly beat the S&P 500 over the past month — up 3.6% versus around 3% for its counterpart. The equal-weighted version lagged poorly for most of 2023. Strong US data bolstered confidence in the economy’s ability to avoid a much-dreaded recession. A so-called “soft landing” could lift cyclical stocks such as industrials and small caps that trade at lower valuations. But many investors say the corporate giants are nonetheless here to stay as core holdings. Yung-Yu Ma, chief investment officer at BMO Wealth Management, said that while “there’s a lot of price” in megacap valuations, that doesn’t mean they’re overvalued.
“If you think about megacaps broadly… they went from being a basic portfolio to an almost absolutely necessary major component of the portfolio once you factor in trends like AI,” he said. declared.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and David Gregorio)