Can AI Enthusiasm Sustain the Magnificent 7’s Momentum?

Investors’ lofty expectations could make it harder for big tech companies to impress

Key Takeaways

• After driving gains for the S&P 500 in 2023, five of the Magnificent 7, a group of stocks made up of Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia, and Tesla, have outperformed the S&P 500 so far in 2024.
• Growth concerns have weighed on shares of Tesla. While Apple surged in the wake of artificial intelligence (AI) announcements in June, its gains in the first half lagged those of Nvidia and other Magnificent 7 stocks.
• Some experts say it could become more difficult for the companies to meet investors’ lofty expectations. Others think the big tech rally could broaden across the market.

While enthusiasm for artificial intelligence (AI) has helped drive many of the Magnificent 7 stocks to outperform the market in 2024 so far, a few have struggled to keep pace.

Looking to the second half of the year, experts warn investors’ lofty expectations for the group—made up of Microsoft (MSFT), Amazon (AMZN), Meta (META), Apple (AAPL), Alphabet (GOOGL), Nvidia (NVDA) and Tesla (TSLA)—could become more difficult to meet, raising questions about how long big tech’s AI-fueled momentum can last.

Most of the Magnificent 7 Has Outperformed the S&P 500 in 2024, But Apple and Tesla Lagged

After the Magnificent 7 stocks drove gains for the S&P 500 in 2023, divergence in the performance of stocks in the group widened in 2024. Nvidia has more than doubling since the start of the year, while Tesla has lost close to 1%.

Meta shares have gained 44%, and Alphabet rose 33%. Amazon and Microsoft climbed 30% and 22%, respectively, fueled by AI-related growth. Those stocks, along with Nvidia, outperformed the S&P 500, which rose 16%. Apple has slightly lagged the index, gaining 15% after the iPhone maker’s stock picked up steam in the second quarter driven by AI announcements.

Tesla is the only Magnificent 7 stock that has declined since the start of 2024, giving way to calls for a reexamination of whether the electric vehicle maker belongs in the grouping. However, it has kicked off July with a surge in its stock that nearly erased year-to-date losses on better-than-expected deliveries in the second quarter. Some analysts have suggested that the fresh numbers could mark a “turning point” for Tesla.

High Expectations Could Make It Harder for Magnificent 7 Stocks To Impress Investors

Looking ahead, it’s become a question of “who can deliver” on investors’ lofty expectations for the Magnificent 7, Steve Sosnick, the chief strategist at Interactive Brokers told Investopedia.

Sosnick expressed concerns about how these companies will keep up with investors’ AI-drive expectations, especially with long development timelines that mean returns on big tech companies’ AI spending could be years away.

Goldman Sachs analysts project that Nvidia, Meta, Alphabet, Amazon, Microsoft, and Apple will see second-quarter earnings grow 30% year-over-year, compared to 9% for the S&P 500 and 5% for the rest of the market. Disappointments, the analysts said, are “likely to be heavily punished.”

Magnificent 7 Moves Will Affect Broader Market

How the stocks perform will likely have an outsized impact on the broader market in the months to come. In the first half of the year, the performance of Nvidia, Meta, Alphabet, Amazon, and Microsoft accounted for 62% of the S&P 500’s return.

The market is being led “by a fairly small list of stocks,” causing it “to become very top-heavy,” Sosnick said. “For better or worse, we’re going to live or die with them,.”

UBS Chief Investment Officer Solita Marcelli said UBS “expect[s] the rally to broaden and investors should not neglect opportunities beyond recent US tech leaders.”

Read the original article on Investopedia.