What is the outlook for Magnificent Seven stocks beyond October
Investing.com -- The outlook beyond October for the "Magnificent Seven" stocks, a group consisting of leading US tech giants, is growing increasingly uncertain, according to BCA Research.
The investment research firm notes that while the companies continued to post solid results in Q3, wider market shifts and increased spending have created headwinds for their future performance.
The Magnificent Seven's earnings growth is slowing down, while capital expenditure (capex) is expected to rise, driven by significant investments in Generative AI (GAI) infrastructure and cloud capabilities.
“While numbers were mostly good, that was not enough to appease investors, who have shifted focus towards GAI Capex and the potential rate of return on these investments,” said BCA strategists led by Irene Tunkel. “Investors punished over-spenders.”
Capex spending among these companies remains highly elevated, and analysts expect this trend to continue into 2025, with firms “frontloading investment ahead of demand,” which has raised investor concerns about over-investment.
In this context, Nvidia (NASDAQ:NVDA ) and Tesla (NASDAQ:TSLA ) may stand out as exceptions, with Nvidia benefiting from a strong order backlog and Tesla from excitement over its upcoming product line, such as robotaxis.
According to BCA, valuation remains a key issue. The Magnificent Seven trades at a substantial premium to the broader S&P 500 , with forward price-to-earnings ratios reaching 33x earnings compared to the index's 21.7x.
“However, there is significant variability within the cohort, with Alphabet (NASDAQ:GOOGL ) trading at 19x forward earnings while Tesla is at 65x,” BCA strategists point out. “On a PEG (Price/Earnings) basis, Nvidia, Meta (NASDAQ:META ), and Amazon (NASDAQ:AMZN ) look attractive thanks to high expected growth.”
This disparity raises questions about the sustainability of their valuations, especially as investors shift focus toward companies outside this group. The "S&P 493" is expected to see a pick-up in earnings growth, potentially making it harder for the Magnificent Seven to justify their high multiples.
The report concludes with a cautionary outlook, suggesting that the “best days are behind the cohort” as they grapple with slowing growth rates and heightened Capex requirements.
With the potential for market democratization, if the economy avoids a hard landing, BCA foresees a scenario where the Magnificent Seven could lag the broader market.
“If the “lower 493” deliver growth as promised, there is probably no need for investors to overpay for the Magnificent Seven,” BCA said.
In this environment, the firm recommends a tactical overweight in Semiconductors and Auto & Components while maintaining a neutral stance on Retail due to Amazon’s positive outlook.
Source: Investing.com
