In the event you had any success investing this yr, there’s probability you owe it to the Magnificent Seven.
These seven mega-cap tech shares (META, AMZN, AAPL, MSFT, GOOGL, TSLA and NVDA) accounted for over two-thirds of the S&P 500’s complete return.
On the wings of 2023’s unprecedented AI growth, they averaged 71% positive aspects in comparison with simply 6% for the opposite 493 firms.
Consequently, the Magnificent Seven now make up practically a 3rd of the index’s complete market capitalization:
(From YahooFinance: The highest seven tech shares dominated 2023 returns, however what about 2024?)
I wrote about how and why that is taking place on this Tuesday’s Inventory Energy Each day, and I’m going to develop on that right here in the present day — as a result of this matter impacts virtually each inventory investor.
Right here’s what it is advisable know…
Magnificent Seven of Tech: Trigger for Concern?
To begin with, I need to be clear that the Magnificent Seven are nice firms.
They’re market leaders with a complete array of aggressive benefits.
So a better valuation is justified. A minimum of partially.
However index and exchange-traded funds (ETFs) have surged in reputation over the past 20 years. And traders are pouring an absolute fortune into the market’s largest shares.
They’re chasing shares into the stratosphere — hoping to capitalize on the red-hot AI mega pattern with a “safer” tech inventory like NVDA or GOOGL.
However how a lot safer are the Magnificent Seven when valuations are practically twice that of the S&P 500 equal-weight common?
(From LPL Monetary Analysis: Astronomical valuations for Magnificent Seven shares.)
I’m sorry, that’s simply too costly.
These shares make up virtually 30% of the S&P 500 Index, too.
So while you purchase into an index fund just like the SPDR S&P 500 ETF (NYSE: SPY) at in the present day’s costs, you’re basically shopping for into these seven shares at a median price-to-earnings (P/E) of 34.
That’s too wealthy for me, even after this yr’s rally!
Proper now, these Large Tech shares are basically “priced for excellent efficiency.”
It’s as if traders assume all of this yr’s boldest AI predictions will inevitably come true.
If that doesn’t occur — if AI falls even somewhat bit quick — then those that make investments at in the present day’s costs could possibly be caught with the invoice in 2024.
And it wouldn’t be the primary time Large Tech fell wanting its personal giddy projections, both…
Buyers Paid the Value for 2021’s EV Hype
Previous to 2022’s bear market, electrical car (EV) makers reached the identical sorts of excessive valuations we see in in the present day’s AI shares.
Vastly bullish projections propped these valuations up — with EV gross sales anticipated to develop as a lot as 70% yr over yr by some business professionals.
Certain sufficient, EV gross sales progress has been phenomenal.
But numbers are nonetheless effectively wanting these astronomical projections (by half, in actual fact).
Consequently, smaller EV automakers have continued to sink even because the broad market recovered.
Onetime EV breakout Nikola Corp (Nasdaq: NKLA) is down greater than 58% in 2023 alone.
Fisker (NYSE: FSR) traders have misplaced 77% since January.
On the one hand, this current expertise is a part of the rationale why traders are flocking to bigger tech shares.
Investing in bigger shares is solely extra secure … at the very least typically.
It provides you publicity to an rising mega pattern with much less volatility.
However even EV mega-stock (and Magnificent Seven member) Tesla Inc. (Nasdaq: TSLA) continues to be down practically 40% from its excessive in 2021.
A “Yellow Flag” for 2023’s Prime Performers
As soon as once more, the Magnificent Seven are nice shares.
However within the phrases of investing legend Howard Marks:
It’s not what you purchase, it’s what you pay. And success in investing doesn’t come from shopping for good issues, however from shopping for issues effectively.
Investing in these shares at in the present day’s costs leaves you with zero margin of security.
The market’s presently pricing in “Blue Sky” projections…
At a time when AI tasks are coming again right down to Earth by way of their general scope and outcomes.
I’m as large an AI supporter as anybody on the market — it’s on the core of a few of my strongest investing programs.
However even I anticipate some hindrances alongside the best way. None of that are presently priced in with a P/E of over 34.
In fact, most of us paid far, far decrease costs for our shares in MSFT, GOOGL and NVDA.
If that’s the case for you, then congratulations on a really great yr within the inventory market!
Seventy-one % returns for doing nothing resides the dream, so far as an investor’s involved.
However it may also be time to consider pumping the brakes…
Actually think about the worth you’ll be paying earlier than including to your ETF holdings over the following few months.
Look into setting a number of stop-losses on a few of your most profitable positions, successfully locking in your long-term positive aspects in case subsequent yr takes an sudden flip.
Which may seem to be extreme warning now, with AI pleasure at its peak.
However issues can flip round very rapidly in tech.
Shares of META Platforms Inc. (Nasdaq: META) infamously tanked 26% in a single day, on February 3, 2022.
It was the most important single-day decline in market historical past at $232 billion.
All it took was one unhealthy earnings report.
New AI tech will doubtless nonetheless shock to the upside in 2024, driving shares of NVDA increased by 20% to 30%.
However it’s extraordinarily unlikely any tech big will repeat this yr’s 230%+ acquire once more.
As a substitute, you’ll need to broaden your horizons to seek out subsequent yr’s largest breakout investments.
And I do know EXACTLY the place to begin…
To good income,
Adam O’Dell
Chief Funding Strategist, Cash & Markets
