The run may be over for the seven stocks that drove the lion’s share of the stock market rally over the past year.
UBS Investment Bank Chief US equity strategist Jonathan Golub downgraded six of the so-called “Magnificent 7” stocks — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Nvidia (NVDA) — from Overweight to Neutral in a new research note on Monday.
His call comes as the Magnificent 7, which also includes Tesla (TSLA), just had its largest weekly market cap loss in history. All seven of the big tech leaders are off their recent highs, as highlighted by a 10% single day-drawdown for Nvidia, its worst one day price performance since March 2020.
Golub, who rates sectors within the S&P 500 (^GSPC) not individual stocks, remains Overweight on technology outside of the six stocks he names in his note. But for the large companies who have grown earnings significantly over the past year, Golub believes the tide may be shifting, and other areas are set to outperform the largest stocks in the S&P 500.
“Investors attribute the run in mega cap stocks to animal spirits and the impact of AI,” Golub wrote. “However, our work indicates that surging earnings momentum (change in forward growth projections) fueled this upside. Unfortunately, this momentum is collapsing.”
Tesla, Meta, Microsoft and Alphabet are expected to report quarterly results later this week.
Earnings for the S&P 500 have largely been driven by earnings growth in the large tech stocks. That’s expected to play out again during first quarter reports, with FactSet projecting Amazon, Alphabet, Meta, Microsoft and Nvidia to combine for earnings growth of roughly 64%. Meanwhile the other 495 companies in the S&P 500 are expected to report an earnings decline of 6%.
But over the course of the year, this is expected to shift. Consensus estimates from FactSet show earnings for those five companies are set to end the year with just shy of 20% year-over-year earnings growth in the fourth quarter, reflecting significantly slower growth than their prior pace. By that point, consensus expects the other 495 companies to be growing earnings by about 17% compared to the year prior, a significant uptick from their current growth rate.
“Our downgrade of the Big 6—from Overweight to Neutral—is not predicated on extended valuations, or doubts about AI,” Golub wrote. “Rather, it is an acknowledgement of the difficult comps and cyclical forces weighing on these stocks. These forces do not apply to other TECH+ companies or the rest of the market in the same way.”
This shift in where earnings are growing the most could be “disruptive in the near term,” Golub said. But given increasing signs that the US economy is growing faster-than-expected this year, Golub thinks a broadening out in earnings performance over the next year keeps his 5,400 call on the S&P 500 to end the 2024 in play.
“This target remains supported by broadly positive fundamentals and a robust economy,” Golub wrote.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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