Can Magnificent 7 Keep Outpacing S&P 500 in 2024?

The "Magnificent Seven" stocks propelled the S&P 500 higher in 2023 and there's reason to hope the party could get going this year if analysts' estimates hold true.The Magnificent Seven, a term coined by Bank of America analyst Michael Hartnett in a research note in May, gained prominence this year as investors flocked to Apple, Alphabet, Amazon, Microsoft, Meta Platforms, Tesla and Nvidia amid economic uncertainty.

The mega-cap stocks' solid cash flow proved attractive at a time when investors were worried that the Federal Reserve's aggressive interest rate increases could push the economy into a recession. A Bloomberg index that tracks these Big Tech names climbed more than 100% in 2023 accounting for the bulk of the 24% rally in the S&P 500.

While such year's gains sent the market cap of these tech giants soaring, "valuations do not yet look 'bubbly' if expected growth profiles are delivered," Goldman Sachs analysts said in their 2024 equity outlook released Nov. 15.

The S&P 500'sInformation Technology sector is expected to post an earnings growth of 16.7%, according to a FactSet report on analysts' estimates on Dec. 16. The sub-sector for Semiconductor and Related Equipment is seen delivering a profit expansion of 34%, while Software could rise 15%, according to a FactSet report dated Dec. 11.

Nvidia, whose stock soared more than 200% in 2023, was among the tech companies that saw the biggest increase in analysts' fourth-quarter earnings estimates since the the end of September, FactSet said. The largest upward revision in earnings estimate was for Intel. Microsoft rounded out the top three, according to the financial data and analytics provider.

The consensus among analysts shows the aggregate earnings per share of the S&P 500, which is heavily weighted to the Magnificent Seven stocks, will grow by 11%, compared with 8% for the equal-weight index. The bigger return of the aggregate index will stem from its greater earnings growth, Goldman analysts wrote in their 2024 outlook.

Among the consumer discretionary stocks, Amazon is expected to be the largest contributor to the sector's projected 21.3% earnings growth, according to FactSet. Excluding Amazon, the sector is forecast by analysts to see a 4.4% decline in profit.

Meanwhile, Meta Platforms is predicted to post the largest earnings growth in 2023's fourth quarter in the S&P 500's Communications Services sector. The Facebook parent is projected to more than double its profit to $4.83 a share from $1.76 a year earlier, according to analysts surveyed by Factset. That would push the growth rate for the Communications Services to 42% this year, the highest of all 11 S&P sectors, according to estimates compiled by FactSet. Without Meta, the sector's earnings growth would only be 25.5%, the data provider said.

The steep climb for the Magnificent Seven didn't come without a price. In March, Meta Platforms unveiled plans for its "year of efficiency" that entailed tighting up the ship and cutting about 10,000 jobs. Meta wasn't alone. Many of its peers, including Google, Amazon, Microsoft, Zoom and Yahoo all followed suit, with Crunchbase estimating that over 240,000 roles were eliminated this year, more than 50% higher than last year.

"The gap in EPS growth between the “Magnificent 7" and the S&P 500's remaining 493 stocks is three times as large, a substantial 9 percentage point (17% vs. 8%)," Goldman said.However, Goldman analysts cautioned investors to examine the risk-reward of piling into these seven stocks.

"You'll get slightly better returns from the seven leading stocks, but not nearly the dramatic difference that you've had this year", David Kostin, Goldman Sachs Research chief US equity strategist, said at a media roundtable event on Nov.16. Billionaire investor Jeffrey Gundlach, the CEO of DoubleLine, offers a more blunt take on the Magnificent Seven stocks. He said investors focused heavily on these tech giants are playing with fire, according to an article on ThinkAdvisor. For Apollo Global Management's Torsten Slok, investors should think twice about investing in the S&P 500 given that the Magnificent Seven stocks now make almost one-third of the index's total market value, MarketWatch reported in early December.

Billionaire investor Jeffrey Gundlach, the CEO of DoubleLine, offers a more blunt take on the Magnificent Seven stocks. He said investors focused heavily on these tech giants are playing with fire, according to an article on ThinkAdvisor.

For Apollo Global Management's Torsten Slok, investors should think twice about investing in the S&P 500 given that the Magnificent Seven stocks now make almost one-third of the index's total market value, MarketWatch reported in early December.

Valuations of the seven companies "are beginning to look similar to the [1970s] 'Nifty Fifty' and the tech bubble in March 2000," Slok told the news site.