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The Magnificent Seven mega-cap firms should continue to outperform the bottom 493 stocks in the S&P 500.
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LPL Financial highlighted the key reason why these stocks have outperformed so significantly.
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“Don’t underestimate the importance of the Magnificent Seven,” LPL’s Jeffrey Buchbinder said.
The “Magnificent Seven” tech giants should continue to outperform the other 493 stocks in the S&P 500.
LPL Financial’s chief equity strategist Jeffrey Buchbinder said in a recent note that the key reason why these stocks have outperformed the broader stock market over the past year is because of their sky-high earnings growth.
“Don’t underestimate the importance of the Magnificent Seven,” Buchbinder said.
The mega-cap tech stocks include Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta Platforms, and Tesla, and were responsible for more than 60% of the S&P 500’s 25% gain last year.
While some Wall Street strategists have been advocating investors to buy smaller stocks after the big run in mega-cap shares, some think there could still be more upside ahead.
The Magnificent Seven “are essentially single-handedly driving earnings growth for the broad market right now,” Buchbinder said, despite the fact that combined, they make up about 28% of the S&P 500.
Collectively, the group is expected to grow earnings by 46% in the fourth quarter, compared to the other 493 stocks in the S&P 500 collectively expecting an earnings decline of 7%. This trend has persisted since the second-quarter of 2023, according to the chart below.
The trend is expected to continue throughout 2024 as the AI technology revolution continues to pick up steam.
“We expect results to be solid given estimates have been revised higher for this group in recent months and the enthusiasm around artificial intelligence continues to build,” Buchbinder said.
Goldman Sachs has a similar view, with the bank’s chief US equity strategist arguing late last year that the mega-cap tech stocks will continue to outperform the rest of the stock market in 2024.
“Analyst estimates show the mega-cap tech companies growing sales at a CAGR of 11% through 2025 compared with just 3% for the rest of the S&P 500. The net margins of the Magnificent 7 are twice the margins of the rest of the index, and consensus expects this gap will persist through 2025,” Kostin said.
Read the original article on Business Insider