Fracturing 'Magnificent Seven' trade puts spotlight on megacap valuations

Published

1 year ago

March 18, 2024

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Diverging fortunes for the massive technology and growth names that have propelled the U.S. stock market higher are throwing a spotlight on their pricey valuations.

The so-called “Magnificent Seven” are collectively trading at an average of 33 times their expected earnings for the next 12 months, up from 26 at the end of 2022, according to LSEG Datastream.

That compares with a price-to-earnings ratio of about 21 for the benchmark S&P 500 index, which has risen over 7% this year.

Investors last year were happy to pay up for the megacaps, given the companies’ solid balance sheets and dominant positions atop their industries.

They have been more discriminating this year, punishing the shares of Tesla and Apple when their outlooks turned murky while fueling dizzying gains in Nvidia.

“When you get to those kinds of valuations you have no room for failure, no room for disappointment,” said Mike Mullaney, director of global markets research at Boston Partners.

Concerns about electric vehicle demand have sparked a near 35% drop in the shares of the former market darling Tesla this year, making it the S&P 500’s worst performer.

The stock traded at about 65 times forward earnings at the start of the year, and is down to about 50.

Another Magnificent Seven member, Apple, has ceded its perch as the biggest U.S. company by market value to Microsoft after its shares declined 10% year-to-date, amid pressure in its China business. The stock’s P/E has fallen from 29 to 25.

Meanwhile, chipmaker Nvidia, which trades at about 35 times earnings, has soared about 80% as it established a dominant position in artificial intelligence applications.

AI optimism has also helped drive a nearly 40% gain in Meta Platforms. The Facebook parent trades at 24 times earnings.

By contrast, the Magnificent Seven last year advanced about 50% for Apple to over 230% for Nvidia. Because of the stocks’ heavy weighting in the S&P 500, the group’s performance accounted for over 60% of the index’s appreciation last year.

The S&P 500 rose 24% in 2023.

Markets are awaiting the coming week’s Federal Reserve policy meeting, which concludes on Wednesday.

A strong economy and sticky inflation have lowered investor expectations for how much the central bank will cut rates this year, leading to a rise in Treasury yields that could pressure stocks if it continues.

Investors gauging whether Nvidia can parlay its massive lead in AI computing into long-term dominance will be watching the company’s developer conference, set to kick off on Monday.

Though AI optimism has helped lift a swath of the Magnificent Seven, many investors are grappling with how to weigh the technology’s potential in their valuation models.

“We are in a unique cycle here with AI, so we are struggling to make sure we optimize the opportunity of this massive transitional shift in technology,” said Ken Laudan, portfolio manager for the Buffalo Large Cap Fund, which holds the seven stocks but is underweight them on a combined basis.

While robust earnings have supported the Magnificent Seven’s valuations, the group’s growth trajectory is due to moderate later this year or early next, said Jeffrey Buchbinder, chief equity strategist for LPL Financial.

“At that point, markets may not want to pay double the P/E for this group,” said Buchbinder, pointing the Magnificent Seven’s trailing P/E of 41 versus 23 for the S&P 500.

Many investors remain sanguine regarding the Magnificent Seven’s valuations.

Five of the seven are trading below their five-year median P/E ratios, while the group is trading more cheaply versus the market than a few years ago, JPMorgan strategists said this week.

Nvidia’s P/E has actually fallen from nearly 60 a year ago as analysts increase their profit forecasts for the chipmaker.

“These are companies that are cranking out enormous amounts of cash, very strong balance sheets, visible sources of revenue growth,” said Katie Nixon, chief investment officer for Northern Trust Wealth Management.

But Apple and Tesla’s shares have recently fallen below their 200-day moving averages. Though the rest of the group are above that mark, more of the Magnificent Seven dropping below their trend lines could be a “warning sign” for the market, Citigroup analysts said.

If the Magnificent Seven “start to go down absolutely you could reverse a lot of the recent almost euphoric sentiment,” said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute.

World

US-Saudi relationship feels tighter than ever as Trump signs flurry of deals

Published

54 mins ago

May 13, 2025

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US-Saudi relationship feels tighter than ever as Trump signs flurry of deals

In today’s Saudi Arabia, convention centres resemble palaces.

The King Abdul Aziz International Conference Centre was built in 1999 but inside it feels like Versailles.

Some might call it kitsch, but it’s a startling reflection of how far this country has come – the growth of a nation from desert bedouins to a vastly wealthy regional powerbroker in just one generation.

Trump latest: President signs huge arms deal with Saudi Arabia

At a bar overnight, over mocktails and a shisha, I listened to one young Saudi man tell me how his family had watched this transformation.

His father, now in his 60s, had lived the change – a child born in a desert tent, an upbringing in a dusty town, his 30s as a mujahideen fighting the Soviets in Afghanistan, his 40s in a deeply conservative Riyadh and now his 60s watching, wide-eyed, the change supercharged in recent years.

The last few years’ acceleration of change is best reflected in the social transformation. Women, unveiled, can now drive. Here, make no mistake, that’s a profound leap forward.

Through a ‘western’ lens, there’s a way to go – homosexuality is illegal here. That, and the murder of Saudi journalist Jamal Khashoggi, are no longer openly discussed here.

Bluntly, political and economic expedience have moved world leaders and business leaders beyond all that.

The guest list of delegates at the convention centre for the Saudi-US Investment Forum reads like a who’s who of America’s best business brains.

Signing a flurry of different deals worth about $600bn (£451bn) of inward investment from Saudi to the US – which actually only represent intentions or ‘memorandums of understanding’ at this stage – the White House said: “The deals… represent a new golden era of partnership between the United States and Saudi Arabia.

“From day one, President Trump‘s America First Trade and Investment Policy has put the American economy, the American worker, and our national security first.”

That’s the answer when curious voters in faraway America wonder what this is all about.

With opulence and extravagance, this is about a two-way investment and opportunity.

There are defence deals – the largest defence sales agreement in history, at nearly $142bn (£106bn) – tech deals, and energy deals.

Underlying it all is the expectation of diplomatic cooperation, investment to further the geopolitical strategies for both countries on key global challenges.

In the convention centre’s gold-clad corridors, outside the plenary hall, there are reminders of the history of this relationship.

There is a ‘gallery of memories’ – the American presidents with the Saudi kings – stretching back to the historic 1945 meeting between Franklin D Roosevelt and King Saud on board the USS Quincy. That laid the foundation for the relationship we now see.

Curiously, the only president missing is Barack Obama. Sources suggested to me that this was a ‘mistake’. A convenient one, maybe.

It’s no secret that the US-Saudi relationship was at its most strained during his presidency. Obama’s absence would give Trump a chuckle.

Today, the relationship feels tighter than ever. There is a mutual respect between the president and Saudi Crown Prince Mohammed bin Salman – Trump chose Saudi Arabia as his first foreign trip in his last presidency, and he’s done so again.

But there are differences this time. Both men are more powerful, more self-assured, and of course the region has changed.

There are huge challenges like Gaza, but the two men see big opportunities too. A deal with Iran, a new Syria, and Gulf countries that are global players.

It’s money, money, money here in Riyadh. Will that translate to a better, more prosperous and peaceful world? That’s the question.

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