Cracks have started to appear in the magnificent seven. It has become increasingly clear that Tesla and Apple no longer qualify for the exclusive club, as their share prices come under pressure. The remainder of these powerful megacaps have managed to keep pace with the lofty expectations set for them – but recent results from ASML and TSMC have created some doubts over their longer-term growth.
After astonishing dominance in 2023, the magnificent seven (Amazon, Apple, Tesla, Microsoft, Nvidia, Alphabet and Meta) has dwindled to just four or five in 2024. In particular, Apple and Tesla have seen their share prices fall significantly. In a single week, Apple lost its crown as the largest smartphone maker in the world to Samsung, while Tesla announced it would be laying off 10% of its staff.
See also: Should investors be rethinking their technology exposure?
Anthony Willis, an investment manager in the multi-manager team at Columbia Threadneedle, says that while some of the megacaps have still led the way for much of this year, the magnificent seven tag no longer works.
He says: “In the short term we should be talking about the Fab Five…with Apple and Tesla, both companies are seeing significant challenges. They’re seeing demand waning for their products and both are reliant on expansion in China for their overall growth.
“Tesla deliveries were down 8.5% year-on-year in the first quarter. Meanwhile Apple’s iPhone sales were down 10% year-on-year. Competition for both companies has increased. For Tesla, a particular challenge is the growth of the Chinese electric vehicle industry. We expect this to be a focus for the inevitable next chapter in the trade wars with China.”
However, even if Apple and Tesla are unceremoniously slung out of the group, the other companies also have their vulnerabilities. The most important weak spot is on valuation. In a recent update, Orbis highlighted the problem with Microsoft: “Microsoft earned almost $100bn in operating profit in 2023, and the market expects that to grow at around 10-15% a year — so it needs to grow profits by about $10-15bn a year, compounded over time. That’s like growing a brand new Coca-Cola in 2024, and then adding another one in 2025, and so on. That becomes hard to sustain, even for the best companies in the world.
“It’s clear the past two years have not really followed the traditional bust of a deflating bubble. The reality has been more awkward and muddled than that. But whether we’re entering a new cycle or still stuck in the old one — what we do know is that it’s an important time for investors to be adaptive and open-minded to avoid the allure of the seemingly-obvious winners that come with potentially unrealistic expectations.”
See also: AI: why investors should look beyond the technology sector
It argues that there are better options elsewhere, giving the example of FLEETCOR, a US payments company with – it argues – greater room to grow and similar growth characteristics. Yet it trades on around half the valuation of Microsoft.
The latest set of results for semiconductor groups TSMC and ASML showed some cracks for AI-related growth stocks. In its Q1 results, TSMC beat revenue and profit expectations, but the shares slipped on weaker forward guidance for chip demand. ASML, now Europe’s most valuable tech company, reported lower orders than expected for the three months to March. Net bookings, a measure of the value of orders received, came in at €3.6 billion, its second-lowest number since 2020 and over 20% lower than expectations. Its share price is down from €913 to €821 over the past week.
It has taken many technology companies down with it. Nvidia’s shares are down 19% over the past month alone, for example. While the results do not call into question the long-term growth trajectory of AI-related stocks, these companies are ‘priced for perfection’ and the expectations embedded in valuations are high. In its last set of results, chipmaker Nvidia reported a 265% increase in sales, smashing analyst expectations. The CEO referred to a tipping point for generative AI, and the shares have risen 54% since the start of the year. Even the slightest hint of weakness was likely to be punished by the market.
This is challenging the dominance of the US market in the short term. The Nasdaq is down 7% over the past month and the S&P 500 is down 5% (source: Marketwatch, to 19 April). This compares to a fall of just 2% in the Eurostoxx index and just 0.44% for the FTSE 100 (source: Marketwatch, to 19 April). The Columbia Threadneedle multi-manager team has been paring back its exposure to US growth holdings, preferring the more compelling valuations on offer in US small and mid-cap companies.
There is an optimistic and pessimistic interpretation of the recent weakness in the technology companies. The worry is that any weakness in the US mega caps may end up taking the rest of the market with it. Jason Hollands, managing director, corporate affairs at Evelyn Partners, takes a more optimistic view, arguing it may prompt investors to take notice of other areas in the market.
He says: “The US economy looks set to achieve a so-called ‘soft landing’ and avoid a once widely predicted recession and interest rate cuts are on the horizon. As investor sentiment improves, this may unleash investors ‘animal spirits’ and see cash ploughed into the stock market across a broader range of sectors than the narrow markets of late.”
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For the time being, the small and mid-cap indices have dropped in line with the S&P 500, though the Dow Jones Industrial Average is only down 3.8% over the past month. Does the technology weakness suggest a turning point? The imminent earnings season will be particularly important. For investors, the recent tech wobble certainly argues for caution on a sector of the market where growth prospects are strong, but embedded expectations are equally huge.
