In the past year, shares of Meta, Amazon, Apple, Nvidia, Alphabet, Microsoft, and Tesla have collectively soared more than 96%, leaving the 22.7% growth of the S&P 500 in the dust.
Such impressive performance cannot continue forever unless these companies make another meaningful discovery (such as developing another artificial intelligence).
In the meantime, one of the main risks for the top 7 stocks is that the corporate earnings growth train may slow with the global economy's slowing.
This has led analysts to downgrade their expectations for the Magnificent Seven.
Take Amundi, a European asset management giant with $2 trillion under management. They do not expect these large-cap stocks to maintain their stellar performance.
Given the high price of these stocks, could there be a risk of a market correction?
Normally, what you look at is the general market situation. If fear increases among investors, they would normally flock to the safer assets, which would cause the riskier ones to fall.
However, this has not been the case in the last two years. On the contrary, the dollar, gold price, and bonds have risen, but the big technology stocks have held firm.
All this is due to the belief in the "too big to fail" principle: these companies will not disappear if things get worse.
So, what could be the trigger for a correction?
Well, Tesla's stock could hold the key: falling confidence in consumer demand, production problems, and, most importantly, lackluster quarterly results.
FactSet estimates that, excluding Tesla stock, the Magnificent Seven will post combined fourth-quarter earnings growth of 53.7% from a year earlier.
In comparison, companies in the S&P 500 index are expected to post earnings declines of 10.5%, excluding those six companies.
But the point is that analysts often get their forecasts wrong and sometimes intentionally underestimate them.
Betting against the market, expecting weak quarterly results, seems a risky move. On the other hand, “nothing ventured, nothing gained”...
What about stimulus factors?
A possible lifeline for the big tech stocks could come from a change in the Fed's monetary policy. However, with strong GDP data and uncertainty over the conquest of inflation (thanks to geopolitical risks), talk of rate cuts seems a little premature.
Answering the question of whether it is a good idea to increase your investment in the Magnificent Seven now, the potential return seems lower than the risk you would take. Ultimately, however, the decision should depend on your own research.
