Big Tech Q4 Earnings and the Future of the Magnificent 7 Stocks
Fourth quarter earnings have been relatively strong for the Magnificent 7 stocks, the mega-cap tech companies that have dominated recent market performance, yet the stock prices haven’t predictably followed earnings. Steady US economic growth, waning risks of a major recession, and optimism for rate cuts in the second half of 2024 may suggest continued momentum for large-cap growth stocks, but concerns remain about the concentrated market created by the impressive run of the Mag 7.
Are there any headwinds and catalysts that can derail their dominance, and how will the rest of the market suffer or benefit from the seemingly unstoppable rise in their market caps? We’ll examine the Mag 7’s earnings performance and unpack the risks ahead.
Alphabet (GOOGL; GOOG) reported lower-than-expected earnings for the fourth quarter, and its shares gapped down as a result. Advertising sales over the holiday season were slower than anticipated, while the company noted that AI-related capital expenditures would increase this year.
Amazon (AMZN) shares rose after its earnings report as the company posted record revenue in the fourth quarter. Revenue and earnings both topped analyst expectations. AI integration is heating up competition in cloud services, and Amazon’s cloud service performed in line with analyst projections for the quarter.
Apple (AAPL) reported better-than-expected earnings, but the stock fell amid declining iPhone sales in China. The growth in Apple’s services business was slower than expected but remains a key long-term growth driver.
Meta Platforms (META) soared after its fourth-quarter earnings release. Earnings growth was impressive – quarterly net profit climbed 27% as the effects of mass layoffs boosted the bottom line. The stock’s climb was also fueled by a shift in the company’s capital management. The company announced a $50 billion share buyback, as well as a quarterly dividend for the first time in its history, and investors cheered the company’s commitment to returning capital to investors.
Microsoft (MSFT) reported better-than-expected earnings, but like Alphabet (i.e. Google), shares of the software giant fell as investors weighed the increased investment costs in AI against its potential for revenue growth. Microsoft’s Azure cloud service competes directly with Alphabet and Amazon as the three companies race to integrate AI into their cloud solutions.
NVIDIA (NVDA) has been the Wall Street darling among the Mag 7 over the last year, and the stock continued its momentum ahead of earnings. While Alphabet and Microsoft shares have come under pressure due to investment costs for cloud service, NVIDIA has been a major beneficiary of the lift in mega-cap tech spending plans for AI.
Tesla (TSLA) reported disappointing fourth-quarter earnings and revenue, sending shares lower. The industry dynamics are different for the EV maker than other Mag 7 stocks, and the company has been impacted by waning excitement over EV vehicles. Questions surrounding the safety of its autopilot have also hampered sentiment.
Does the Mag 7’s Dominance Increase Market Risks?
AI has largely fueled the outperformance of the Mag 7, and their subsequent market cap growth has led to the most concentrated S&P 500 index over the last century. A key concern amid their outperformance is the potential that the Mag 7 stocks could fall out of favor, which could lead to a significant market drawdown or crash, as we have seen in previous overheated markets. Higher overall market valuations have historically indicated a heightened probability of a large equity drawdown. However, removing the Mag 7 from the S&P 500, equity valuations appear more in line with historical averages. It is hard to make a case that investor fervor in AI has led to an overall asset bubble which would place the equity markets broadly at risk.
One potential catalyst that may impact stock performance for the Mag 7 and other AI-related stocks is the regulatory landscape. Each Mag 7 company faces different legislative and regulatory hurdles, such as efforts to ensure social media companies are equally as liable as traditional media outlets, growing concerns about deepfake AI and IP ownership, and the safety of products that rely on AI. These regulatory issues will play out differently for each company, in unpredictable ways, over the next few years.
Outside of legislative headwinds, the Mag 7 also all have different exposures to global markets and are therefore subject to unique global economic and geopolitical pressures. Each of the Mag 7 stocks also provides strong network effects and presents unique growth opportunities.
With the Mag 7 companies continuing to generate impressive cash flows on strong fundamental business models, it isn’t likely that all companies will fall like dominos in a market bubble crash. Instead, it appears more likely that we will see the performance of these companies slowly decouple as the AI market evolves. The concentration at the top of the index isn’t likely to shift dramatically soon. But, we may see a few new tech names added to the list of mega-cap leaders as AI continues to shape the growth in the sector. This of course begs the question, what tech company will be the next to join this all-star lineup?
