By Louis Krauskopf
NEW YORK (Reuters) – A handful of the big growth and technology names that dominated the U.S. stock market in 2023 are set to report earnings in the coming weeks, which could set the tone for this year’s stock rally.
Recently dubbed the “Magnificent Seven” by investors, stocks of US companies with the largest market caps are up between 40% and more than 200% so far this year. These moves accounted for a large share of the S&P 500’s 17% year-to-date rise, and pushed the index to its highest level since April 2022.
The huge gains came with big earnings expectations for the seven companies: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms. BofA Global Research expects it to increase earnings by an average of 19% over the next 12 months, more than double the estimated 8% increase for the rest of the S&P 500.
They will need strong results to justify the excellent ratings. These companies trade with an aggregate price-to-earnings ratio of about 40 times, compared to 15 times for the S&P 500 index excluding those companies, according to BofA.
Their results may be decisive for the market as a whole. Fueled by its recent gains, stocks of the giants have jumped to dominate benchmark indices, causing headaches for some active fund managers. In the S&P 500, the seven stocks make up 27.9% of the index’s weight.
Investors will look beyond the second-quarter results, said Bill Callahan, investment strategist at Schroders.
“It’s also how these large, market-carrying companies … can be a guide for the rest of the year and into 2024,” he said.
Overall, the seven companies account for 14.3% of total estimated S&P 500 earnings for the second quarter, and 9.3% of estimated revenue, according to Taginder Dillon, senior research analyst at Refinitiv.
Among the reports in the previous quarter, Nvidia was one of the most notable. The semiconductor company’s revenue forecast blew past estimates as it said it was boosting supply to meet growing demand for its AI chips, adding to market excitement about AI. Nvidia shares are up over 200% this year
Tesla is the first among the growth giants to go public, with earnings expected on Wednesday. The Elon Musk-led company said this month that it delivered a record number of vehicles in the second quarter.
Microsoft and Meta are among the companies due to report in the following week, and investors are expected to focus on how the companies seek to harness artificial intelligence.
While the benefits of AI may not be realized immediately for every company, investors are eager to learn “more about how we can turn that into money, basically,” said Thomas Martin, senior portfolio manager at Globalt Investments.
“It’s going to take some time for it to work its way up and show up,” said Martin, who is overweight in some huge stocks. “Along the way, people are going to want to see some kind of progress.”
There are signs that the market’s gains are expanding beyond the blue chips. The equal-weight S&P 500, a proxy for stock average, has been modestly outperforming the S&P 500 over the past month — up 3.6% versus about 3% for its peer. The equal-weight version has been badly delayed for most of 2023. Strong US data has increased confidence that the economy can avoid a long-feared recession. A so-called “soft landing” can lift cyclical stocks such as industrial companies and small businesses that are trading at cheaper valuations. But many investors say the giants are here to stay nonetheless as important assets. Yung-Yu Ma, chief investment officer at BMO Wealth Management, said that although there are “a lot of prices” in the valuations of the big companies, that doesn’t mean they are overvalued.
“If you think about large companies on a large scale… they’ve gone from a core holding of a portfolio to an almost essential component of a portfolio once you factor in trends like artificial intelligence,” he said.
(Reporting by Louis Krauskopf; Editing by Ira Yosipashvili and David Gregorio)