Market rebound helps the Magnificent Seven stocks ride again
The sharp rise in equity markets this year has been nothing short of astounding.
Many investors had written off stocks after last year’s heavy falls, and amid fears about central bank rate rises and the threat of a global recession as we entered 2023.
But last month, the S&P 500 rallied into a bull market. For the first six months of the year the index is up 16 per cent – its best performance since the first half of 2019.
The tech-heavy Nasdaq surged 32 per cent, which is its best first half in four decades.
But just a few soaring stocks have driven almost all of the market’s rebound.
Together Amazon, Microsoft and Alphabet contributed nearly 30 per cent of the gains made by the S&P 500 in the first half of the year.
Adding Nvidia, Meta Platforms, Apple and Tesla this exclusive group of just seven AI and technology winners accounted for almost 80 per cent of index gains, despite representing just a quarter of the value of the index.
Such phenomenal performance so quickly from the largest companies has led some investors to wonder if the “magnificent seven” stocks have run too far and whether they should take profits by selling.
In fact, the best days for these stocks are still ahead and holding on to them will be extraordinarily rewarding.
There are compelling reasons why several of these big-tech winners have much further to go in the years ahead, and investors who hang onto them will be richly rewarded.
Yes, these seven stocks rallied hard in the first six months. Yet when we look at the past 18 months – including all of 2022 and the first half of 2023 – their performance is mostly negative.
Over the longer horizon, the weighted average share price performance of the group was negative 3 per cent, compared with positive 63 per cent over the shorter period. Only Nvidia and Apple posted positive results over the last year and a half.
Microsoft was flat, and the other four stocks are still down significantly from the start of 2022.
What’s more, while the share prices of industry leaders, including big-tech winners, have posted strong gains in the first half of this year, their stock prices still haven’t caught up to huge improvements in their businesses, which suggests the rally has further to run.
Here are four key stocks to consider now.
Amazon: Its cloud business, AWS, recently made several new high-powered AI capabilities available to customers, including its own specialised chips for training and machine learning models, a new managed service to access first and third-party AI models, and an AI-assisted coding program.
Amazon has also been making large strides outside its cloud business.
The e-commerce behemoth redesigned its US fulfilment network to operate a regional model with lower costs and faster shipping times for consumers.
Despite these game-changing improvements, Amazon’s stock is down 22 per cent from the start of 2022.
Microsoft: Earlier this year its Azure cemented its place as an AI pioneer by deepening its partnership with OpenAI to provide customers access to the machine learning models behind ChatGPT and DALL-E, powered by Azure’s cloud platform.
Last quarter, Azure OpenAI customers jumped ten-fold.
Microsoft also announced a new “Copilot” AI assistant, which combines OpenAI’s machine learning models with Microsoft’s proprietary data to improve the productivity of Office applications like Word, Excel, and PowerPoint.
Copilot versions of these programs should command a premium price and expand the appeal of Office beyond its current 382 million users.
Yet Microsoft shares trade roughly flat relative to the beginning of 2022.
Meta (Facebook): Meta may be an even more striking case study.
Following the disruption from Apple’s app ad-tracking changes, and white-hot competition from TikTok’s short-form videos over a year ago, Meta has executed a successful business turnaround underpinned by substantial AI investments.
Powerful AI capabilities have allowed Meta to overcome headwinds. It has regained “share of engagement” with AI-recommended content in Reels short-form videos, and AI-enabled chatbots promise to expand its $US10bn message-based ads business.
Yet Meta’s share price is down 15 per cent compared with 18 months ago when the company was grappling with a perfect storm – and that’s after gaining 138 per cent in the past six months.
Blackstone: A similar situation can be seen away from the world of tech companies, in the wider financial services sector.
Blackstone, the world’s largest alternative assets manager, has built a team of hundreds of salespeople and partnered with major banks and brokers, establishing itself as a first mover in the $US195 trillion private wealth channel.
The money manager has also made major inroads to service the $US45 trillion insurance market, while continuing to raise larger funds among its traditional institutional clients that represent a $US65 trillion market.
Meanwhile, Blackstone’s share price is almost 30 per cent cheaper than it was at the start of 2022, including its 25 per cent rally this year.
Hold on to winners
The public equity markets can have a way of tricking investors in the short term. While stock prices of some of the world’s best companies are up a lot this year, they are only just getting back to where they were at the beginning of last year.
Meanwhile, their underlying businesses are much better positioned than they have ever been and keep getting better. These are companies which can multiply in value many times over by the end of this decade.
Selling out to take profits from a 50 per cent or even 100 per cent turnaround following a big drawdown might well look like a big mistake if these stocks increase four or five-fold in the years ahead.
Investors have an opportunity to make extraordinary gains if they can stay the course with winning companies as they transform industries and create value over time.
Chris Demasi is portfolio manager at Montaka Global
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