Friday, February 23, 2024 9:13:33 AM
It seems the job of a macro-market analyst has never been easier. As go Nvidia’s fortunes so goes the S&P 500 SPX. AI mind control is already here.
It wasn’t too long ago that it was the Magnificent Seven who corralled, then drove sentiment. But that posse is no longer a coherent force.
“R.I.P. Magnificent Seven Era” is the title of a new note from Jones Trading’s chief market strategist Mike O’Rourke, who says he came up with the moniker for big-tech in spring 2023.
It’s here we should note that some think it was Bank of America’s Michael Hartnett who first used the Mag 7 description for Alphabet (GOOG), Amazon.com (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA).
No matter, O’Rourke’s new reasoning is apposite. Simply put, he thinks Nvidia and Meta should strike out on their own given recent events. The Terrific Two, perhaps? …….Okay, sure, we can work on that.
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“It was last April when we coined the term ‘Magnificent Seven’ to encapsulate the seven largest stocks in the S&P 500 as they drove 88% of the index’s gains in the first 4 months of 2023,” he writes in the note published late Thursday. “Today’s events, along with others that unfolded thus far in February 2024, have sown the seeds for the end of that remarkable run.”
The $277 billion of market cap that Nvidia added Thursday is a record that beats the previous$196 billion one set by Meta earlier this month, says O’Rourke.
“These two companies, along with these moves, are playing a prominent role in slaying the Magnificent Seven as we know them,” he adds. The main reason is that this results season has shown a clear divergence in the earnings performance of the Mag 7, he says.
For example, Nvidia stock is now trading on 33 times readily achievable forward earnings projections. “Historically, semiconductors are a cyclical business in which their multiple should shrink as they go higher, but this is a market that enthusiastically awards 35x plus multiples to Trillion Dollar enterprises,” says O’Rourke.
As for Meta, Mark Zuckerberg’s flirtation with the metaverse has been reined in, costs have been trimmed and the generally highly profitable company is well-positioned to exploit AI, O’Rourke reckons. The forward earnings multiple is 24.4, with only Google in the Mag 7 sporting a lower one.
“This earnings season has shown that Nvidia and Meta Platforms have both lower multiples and significantly faster growth than other Magnificent Seven names, and that is why other members will be deemed less attractive given their expensive multiple and megacaps status,” says O’Rourke.
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