By Lewis Krauskopf
NEW YORK A handful of massive growth and technology names that have dominated the U.S. stock market in 2023 are set to report earnings in coming weeks, potentially determining the path for this year’s equity rally.
Lately dubbed the “Magnificent Seven” by investors, shares of the U.S. companies with the biggest market values soared between 40% and over 200% so far this year. Those moves have accounted for a lion's share of the S&P 500's 17% year-to-date rise and propelled the index to its highest level since April 2022.
The outsized gains have come with big earnings expectations for the seven companies: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms. BofA Global Research projects they will increase earnings by an average of 19% over the next 12 months, more than double the an 8% estimated rise for the rest of the S&P 500.
They will need strong results to justify premium valuations. Those companies trade at an overall trailing price-to-earnings ratio of about 40 times, versus 15 times for the S&P 500 excluding those companies, according to BofA.
Their results may be crucial to the market as a whole. Fueled by their recent gains, megacap stocks have climbed to dominate benchmark indexes, causing headaches for some managers of active funds. In the S&P 500, the seven stocks comprise 27.9% of the index's weight.
Investors will look beyond second quarter results, said Bill Callahan, an investment strategist at Schroders.
“It’s also how do these big companies, which are carrying the market ... guide for the rest of the year and into 2024,” he said.
Overall, the seven companies account for 14.3% of overall S&P 500 estimated earnings for the second quarter, and 9.3% of estimated revenue, according to Tajinder Dhillon, senior research analyst at Refinitiv.
Among the reports in the previous quarter, Nvidia was one of the standouts. The semiconductor company's revenue forecast blew past estimates as it said it was boosting supply to meet surging demand for its artificial-intelligence chips, further fanning the market's excitement over AI. Nvidia shares are up well over 200% this year
Tesla is the first of the growth giants to report, with earnings expected on Wednesday. The Elon Musk-led company this month said it delivered a record number of vehicles in the second quarter.
Microsoft and Meta are among the companies due to report the following week, and investors are expected to focus on how companies are seeking to harness AI.
While AI benefits may not immediately materialize for every company, investors are eager to learn "more about how they are going to convert that into money, essentially," said Thomas Martin, senior portfolio manager at Globalt Investments.
"It’s going to take some time for that to work its way through and to show up," said Martin, who is overweight some of the megacap stocks. "Along the way, people are going to want to see some sort of progress."
There are signs market gains are broadening beyond the megacaps. The equal-weight S&P 500, a proxy for the average stock, is modestly beating the S&P 500 over the past month -- up 3.6% versus about 3% for its counterpart. The equal-weight version trailed badly for most of 2023. Strong U.S. data have driven confidence the economy can avoid a long-feared recession. A so-called "soft-landing" could lift cyclical stocks such as industrials and small-caps that are trading at cheaper valuations. But many investors say the corporate giants are nevertheless here to stay as critical holdings. Yung-Yu Ma, chief investment officer at BMO Wealth Management said that while “there is a lot priced in” to megacaps’ valuations, that did not mean they are overvalued.
"If you think about the megacaps broadly ... they have gone from a core holding of a portfolio to an almost absolute necessary major component of the portfolio once you factor in trends such as AI," he said.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and David Gregorio)