Price decline of the Magnificent Seven: The tech boom is shaky!

Price decline of the Magnificent Seven: The tech boom is shaky!

The so-called “Magnificent Seven,” which includes Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia and Tesla, continue to dominate the US technology sector. These companies have a significant influence on major indices and growth on Wall Street. A report from Goldman Sachs shows that the valuation levels of these tech heavyweights have fallen to their lowest level since 2018. The current average price-to-earnings ratio (NTM P/E) of these seven companies is 28, which is above the S&P 500 average of 20 but is in the 30th percentile over the past ten years and below the historical average.

A look at the reasons for the decline in valuations makes the picture clearer: In particular, there are doubts about the timely profitability of billion-dollar investments in artificial intelligence (AI). While Nvidia presents strong figures, Apple and Meta are struggling with operational implementation. Increasing regulatory risks, particularly in the form of antitrust proceedings against Alphabet, Apple, Microsoft and Meta, add to the uncertainty. Despite these challenges, there are also opportunities. Many investors have reduced their tech positions, resulting in “light positioning”. In addition, a possible boost from the quarterly figures from Microsoft or Meta could promote price increases. Goldman rates many of the Magnificent 7 as slightly undervalued when considering balance sheet quality and earnings growth.

Current market development

After a strong start to the year, the shares of the “Magnificent Seven” have lost value. Rising interest rates hurt growth and investor confidence. The seven companies accounted for about two-thirds of the Morningstar US Market Index's 20.6% return in the first half of 2023, but all seven stocks have been in the red since August, with Tesla posting the biggest decline of 23%.

Microsoft has lost just 2.2% since July, while Apple accounts for nearly a percentage point of the index's 10% loss over the past three months. The Magnificent Seven account for about a quarter of Morningstar U.S. losses. Market Index, which ended last week with a correction of 10% below the July 31 peak. Rising bond yields and robust economic data have had a negative impact on stock prices.

Valuations and investor behavior

Confidence in growth stocks suffers from higher interest rates, which make future earnings seem less valuable. As a result, investors have shown less interest in expensive stocks, which has also affected the momentum of the Magnificent Seven. According to Morningstar, Nvidia, Apple, Tesla and Meta are rated 3 stars (fairly valued), while Amazon, Microsoft and Alphabet are considered undervalued with 4 stars.

Despite the challenges, some of the Magnificent Seven have grown significantly this year. Nvidia, for example, has gained an impressive 176% since the beginning of the year, Apple can look back on an increase of 29%. Nevertheless, the market rally has not yet spread to broader stocks, which is further unsettling investors. Around 24% of 852 US companies analyzed were up last week, while 76% were down. Sector overview: The utilities sector recorded the best performance with +1%, while the energy sector performed the worst with -5.84%.

U.S. 10-year Treasury yields fell to 4.83% from 4.92%, while crude oil prices fell 3.62% to $85.54 a barrel. Given these developments, it remains to be seen how the Magnificent Seven and the technology sector as a whole will respond to the current inflation-related challenges.