Microsoft, Meta, and Other Mag 7 Stocks Could End Up Victims of Their Own Scccess
The rise of artificial intelligence has led to unprecedented profit growth for the Magnificent Seven tech companies. With Tesla leading the charge with a remarkable nine-day turnaround, all seven companies including Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, and Nvidia have seen significant gains this year. The average gain for the group is 45%, outperforming the S&P 500 by 9 percentage points over the past 10 days.
Together, the Mag Seven now account for about 34% of the S&P’s market value, reaching the highest level in the past five years. Their stocks have gained roughly 380% over the same period, effectively doubling the market’s return. The surge in artificial intelligence has propelled Nvidia to surpass $3 trillion in market value, a $2.1 trillion increase over the past year.
Analysts like Dan Ives from Wedbush are bullish on the AI revolution, comparing it to the internet era for stocks in 1995. Ives rates Tesla, Microsoft, and Apple as Buy, while his colleagues at Wedbush also rate shares of Nvidia, Meta, Alphabet, and Amazon as Buy.
The success of the Mag Seven has been undeniable, with the Roundhill Magnificent Seven ETF hitting record highs for four consecutive days. However, the rapid gains could pose a challenge for the group in the near future. Market technician Frank Cappelleri notes that the relative strength of the Mag Seven compared to the S&P 500 has gone parabolic, indicating the possibility of a correction.
While the fundamental outlook for the Mag Seven remains strong, technical analysis suggests that the stocks may have reached a point of overvaluation. With a collective relative strength close to 80, a reading above 70 typically signals peak performance. Investors will need to monitor the situation closely to determine if the current momentum can be sustained.
A stock with a high relative strength number is considered “overbought.” This observation is particularly intriguing as we head into earnings season, according to Cappelleri in a recent interview with Barron’s. The question arises about how well certain companies need to perform to sustain their current momentum.
Nvidia, a prominent AI stock, is set to report quarterly results later this month with Wall Street expecting earnings per share of 64 cents. The company has consistently surpassed estimates by significant margins in recent quarters, and will need to continue this trend to keep its stock on an upward trajectory.
Despite being overbought, it doesn’t necessarily imply an imminent decline. However, some market analysts anticipate a period of consolidation in the near future. Institutional investors are finding it challenging to keep pace with the market due to the dominance of the “Mag Seven” stocks, which are driving most of the gains.
The pressure to outperform can lead to increased buying activity, making it difficult for investors to divest from their top-performing stocks. Nevertheless, a cautious approach may be warranted, especially in terms of reducing exposure to the Mag Seven stocks.
While the current AI-driven rally may persist, it’s essential to remain vigilant as the market has a history of correcting overly optimistic sentiments. DailyBubble advises investors to carefully monitor their investments and consider rebalancing their portfolios accordingly.
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