Markets are becoming more discerning. Even some of the technology giants are being re-examined as the focus on fundamentals increases.
- Nvidia and Meta have pulled ahead of the rest of the ‘Magnificent Seven’.
- Apple and Tesla are the clear laggards, having struggled to generate sufficient growth
- Markets are increasingly rewarding traditional metrics such as strong sales and financial strength
Investors may need a new moniker for the year ahead. The Magnificent Seven is starting to fracture into the ‘still magnificent’ and ‘not so magnificent’, as the market re-evaluates their growth prospects.
Over the past 12 months, there have been two clear winners: Nvidia and Meta. Nvidia, because it is a direct play on the growth of AI, and Meta, because investors have re-evaluated its prospects after a tough 2022. Nvidia has seen its share price rise 211% over the past 12 months, and Meta’s share price is up 156% (source: MarketWatch to 7 Feb). Amazon has also put in a creditable performance, with its share price rising 66%, and Microsoft is up 54%.
The rest of the Magnificent Seven hasn’t been looking quite so good. In spite of its AI credentials, Google is up 35%, while Apple is up 22%, approximately in line with the S&P 500. However, Tesla is the real problem child. Its share price has been sliding since the summer, and is now 6% below its level a year ago. It faces multiple challenges, including slipping growth for electric vehicles, and increasing competition from Chinese EV maker BYD.
Chris Beauchamp, Chief Market Analyst at IG Group, says the divergence of fortunes between this previously homogenous group suggests a welcome new focus by the market on the prospects for individual companies: “Factors such as strong sales, the ability to pivot and adapt to market changes, and the announcement of dividends have become key in supporting stock performance. For example, Meta's pivot towards virtual reality and augmented reality, along with its strong advertising revenue, has kept investor confidence high. Microsoft's dividends and its cloud business's growth have made it a reliable bet for investors seeking both growth and income,” he says.
Apple has suffered because of its exposure to China, where it still sources much of its manufacturing, and from unexciting sales growth. Tesla’s inflated valuation has been exposed by the weakness in the EV market. It is no longer enough to be one of the ‘Magnificent Seven’; companies need to deliver on their promises.
This should be a good sign for active managers, suggesting markets are rewarding traditional metrics, such as growth and profitability, rather than the label. It also shows the risks inherent in relying on a handful of index giants to do the heavy lifting on portfolio returns. 2024 could be a different year altogether.
