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Can the Magnificent Seven Defy Gravity Again?

Cam White | August 16, 2024

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The Magnificent Seven – the group of megacap tech stocks that have captured the market’s imagination – continue to spark debate. While some investors see a market reaching its zenith, Wall Street analysts paint a different picture. Their prediction? Another round of substantial gains is on the horizon. Even for those who prefer a diversified approach, this bullish outlook offers a glimmer of hope.

The journey of these tech giants has been remarkable. The Roundhill Magnificent Seven ETF, mirroring their performance, has surged 37% this year, dwarfing the S&P 500’s 17% gain. Companies like Nvidia, riding the AI wave, have seen their stock prices skyrocket. Only Tesla, grappling with challenges, has experienced a decline.

This extraordinary success has raised concerns. Have these stocks ascended too rapidly? Even with impressive earnings growth, their valuations appear stretched compared to the broader market. Their sheer size means they constitute a significant portion of major indices. This has led some to worry about a market overly reliant on a few players, or even a bubble ready to burst.

Yet, Wall Street’s analysts remain unfazed. They anticipate further gains for the Magnificent Seven, outpacing the broader market. Amazon, in particular, is projected to see significant upside, followed by Alphabet, Microsoft, and Nvidia.

Amazon’s recent dip, triggered by a quarterly sales miss, has created this opportunity. However, the company’s overall performance was far from disastrous, with better-than-expected profits and robust growth in its cloud computing division. Consequently, most analysts view this as a temporary setback. The long-term trajectory remains positive.

Wall Street’s optimism isn’t universal. Meta and Apple are expected to lag behind the broader market, while Tesla’s stock is predicted to remain relatively flat. However, excluding Tesla, the outlook for the remaining six is even more promising, with analysts forecasting nearly 17% returns in the coming year.

The question remains: Can these stocks continue to outperform? It’s important to approach analyst predictions with a degree of skepticism. Wall Street analysts are known for their inherent optimism, especially when it comes to high-profile tech companies. This can be attributed to various factors, including the pursuit of investment banking business and a general bullish sentiment that encourages trading activity.

Nevertheless, even for those who favor a passive, index-based approach, the bullish forecast is encouraging. The Magnificent Seven represent a considerable portion of major indices. Their continued success could uplift the entire market, benefiting investors across the board.

In the ever-evolving landscape of the market, the Magnificent Seven stand as both symbols of innovation and subjects of intense scrutiny. While their future performance remains uncertain, Wall Street’s confidence serves as a reminder of their potential. Whether you’re an active trader or a passive investor, their journey is one worth watching.