The Demise of the Magnificent Seven: Time to Reassess Your Investment Strategy
Key Findings:
* The once-booming Magnificent Seven trade, comprising Meta, Amazon, Google, Apple, Nvidia, Microsoft, and Tesla, has faltered in recent months.
* Reasons for the sell-off include weakening sales, concerns over excessive spending on AI infrastructure, and lofty valuations.
* Market experts like Adam Parker of Trivariate Research now recommend reducing exposure to these stocks due to their elevated beta, capital intensity, and over-ownership.
Analysis:
The Magnificent Seven trade has long been a staple for US equity managers. However, as the tech sector faces headwinds, it's time to rethink this approach.
Despite the recent sell-off, valuations for Magnificent Seven stocks remain high, with their relative price-to-forward earnings multiple at a 42% premium to the rest of the S&P 500. This is nearing the upper range of its 25-year average.
Furthermore, these stocks have seen significant capital expenditure commitments. Meta, Microsoft, Amazon, and Alphabet are projected to spend $325 billion on capex this year, raising concerns about the return on investment.
In addition, the Magnificent Seven are heavily over-owned by investors, with their aggregate market cap exposure approaching a third of the total US equity market. On a beta-adjusted basis, this exposure rises to nearly 50% for managers holding these stocks at market weight.
The overbullish sentiment surrounding these stocks, with only 4.8% of analyst recommendations being Sells, may be disconnected from current market conditions.
Conclusion:
Investors looking to preserve capital should consider reducing their exposure to the Magnificent Seven. The combination of elevated beta, capital intensity, high valuations, and over-ownership presents a significant risk in the current market environment. As the tech sector continues to face challenges, it's prudent to diversify portfolios and explore alternative investment opportunities.