Tech stocks: what’s in store for the magnificent 7

The Magnificent 7 tech stocks were the big story of 2023. Alphabet, Amazon, Apple, Tesla, Nvidia, Meta and Microsoft dominated financial markets and were integral to the direction of US and global stock markets. But will this be the case in 2024? Below we will take a look at what 2024 could have in store for mega tech, and how the magnificent 7 could change in the coming months.

Financial markets have been fairly directionless so far in January. Volatility has started to move higher as stocks and bonds retreated on the back of central banks pushing back on expectations for rate cuts. This has hurt the overall market. The S&P 500 was lower by 0.44% in the last week and has been down a touch since the start of the year. The S&P 500’s IT sector has fared better than the overall index, it is up 1.53% in the last week, and is 1.94% higher so far this year. The magnificent 7 are an important part of the overall US index, but for indices like the FTSE 100, which has very little tech exposure, its performance has been even worse. The FTSE 100 is lower by 1.5% in the past week and is down by 3.59% YTD. Tech has had a good start to 2024 so far.

Determining how well tech will do for the rest of the year will depend on various factors.

• Their ability to grow earnings in the year ahead. Big tech companies like Apple, Amazon and Alphabet create products and software that are critical to consumers and businesses, which makes them fairly recession proof. If there is an economic downturn, big tech may be able to protect their earnings compared with other segments of the market. Taiwan Semiconductor, a major global chip maker, released a strong set of earnings for Q4 and expects a strong performance in 2024. This suggests that demand for tech could be strong in the coming year.
• They can also benefit from a disinflationary environment where interest rates are falling. Although there is some uncertainty about when interest rates will fall this year, the market is still expecting rates to fall. This is positive for tech stocks since it means their future earnings projections, which are usually high, do not get eroded by inflation or higher interest rates.
• In Q3, big tech reported a strong set of earnings, and they could do the same for Q4 when they release earnings in the next few weeks.
• Tech stocks are sometimes labelled as overpriced. However, sometimes you have to pay for quality. Nvidia’s 12-month forward price to earnings ratio is 28.77. Microsoft’s is 34.7, Alphabet’s is 21.5, Amazon is at 40, Apple is 28.5 and Tesla’s is 66. The magnificent 7 have higher forward P/E ratios than the average for the S&P 500, which is 19.8. A high P/E ratio can signal that the stock is overvalued. As you can see, there is divergence between the magnificent 7’s forward P/E ratios, and some are better value than others.
• Whether or not a company’s PE ratio is fair depends on the relationship between the PE ratio and expected earnings growth. This analysis shows that Meta and Nvidia’s expected earnings justify their PE ratios, and these companies may not be over-valued. However, Microsoft, Apple and Tesla need to deliver stellar results to ensure their PE ratios are justified.
• Due to this, there is differentiation between the magnificent 7, with some valuations looking justified and others looking overvalued.

AI: still dominating markets in 2024

The AI theme was the hot topic of 2023, in 2024 this topic is still a major talking point; however, the focus is now on the monetization of AI. In the magnificent 7 some are more exposed to AI than others. For example, Nvidia provides the chips needed to power the best AI models and Microsoft is a major stakeholder in OpenAI. Meta is also making a big push into AI, although its efforts are yet to bear meaningful fruit, Alphabet has made some inroads but is still lagging behind its rivals. Tesla has AI capabilities, but Elon Musk is facing a battle with the Tesla board to expand its efforts. Apple and Amazon have less focus on AI.

Looking ahead, we believe that the biggest tech stocks with direct AI exposure could benefit the most from a continuation of the AI theme in 2024. The path of least resistance is for Microsoft and Nvidia to continue to dominate the AI space, and we think that this will pay off for these companies in the coming months.

Nvidia has already had a stellar start to 2024. Its stock price is up by more than 13% so far this year, and by 4.5% in the last week, even though the broader market has been battered by a bout of volatility. This suggests that Nvidia is still in demand and has some defensive qualities that could help protect its stock price in periods of risk aversion. At the recent Computers and Electronics show in Las Vegas, Nvidia announced that its focus for 2024 was personal computing AI. This push into personal computing has cheered investors since it can be a big money spinner, just think of Microsoft and Apple in years gone by.

Microsoft hasn’t performed as well as Nvidia so far in 2024, however it is higher by more than 4% so far this year and is up by 3.4% in the last week. It also overtook Apple as the world’s most valuable company. We think it managed to overtake Apple due to its exposure to AI.

The chart below shows the stock price performance of the Magnificent 7 over the last year. The chart has been normalized to show how these stocks move together. As you can see, Nvidia, the yellow line, is leading the pack. Microsoft, the purple line, is trailing Nvidia along with the rest of the Magnificent 7, however, its stock price has turned higher, while the other tech giants are lower or moving sideways.  As we move through 2024, we could see differentiation within the stock performance of the magnificent 7, with Nvidia and Microsoft leading the way.

Chart: Magnificent 7, normalized to show how they move together

Source: Bloomberg

Tech and the economic outlook

While AI is a theme within the tech sector that could drive robust individual performance for certain members of the magnificent 7, the fate of other tech stocks could depend on the economy. Some magnificent 7 stocks like Apple have defensive properties, such as massive cash piles. This means that if there is an economic downturn Apple and other tech stocks with defensive qualities could outperform. However, if the economy does have a soft landing as the Fed starts cutting interest rates in March or soon after, then it could allow the other more cyclical sectors in the S&P 500 to play catch up.