Led by Apple, a handful of massive growth and technology names that have dominated the U.S. stock market in 2023 are set to report earnings in coming weeks, potentially determining the path for this year’s equity rally.
Lately dubbed the “Magnificent Seven” by investors, shares of the U.S. companies with the biggest market values soared between 40% and over 200% so far this year. Those moves have accounted for a lion’s share of the S&P 500’s 17% year-to-date rise and propelled the index to its highest level since April 2022.
The outsized gains have come with big earnings expectations for the seven companies: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta Platforms. BofA Global Research projects they will increase earnings by an average of 19% over the next 12 months, more than double the an 8% estimated rise for the rest of the S&P 500.
They will need strong results to justify premium valuations. Those companies trade at an overall trailing price-to-earnings ratio of about 40 times, versus 15 times for the S&P 500 excluding those companies, according to BofA.
Their results may be crucial to the market as a whole. Fueled by their recent gains, megacap stocks have climbed to dominate benchmark indexes, causing headaches for some managers of active funds. In the S&P 500, the seven stocks comprise 27.9% of the index’s weight.
Overall, the seven companies account for 14.3% of overall S&P 500 estimated earnings for the second quarter, and 9.3% of estimated revenue, according to Tajinder Dhillon, senior research analyst at Refinitiv…
Yung-Yu Ma, chief investment officer at BMO Wealth Management said that while “there is a lot priced in” to megacaps’ valuations, that did not mean they are overvalued.
MacDailyNews Take: As we wrote last week, “As fund managers buy and sell after the rebalance, forced by their own rules and limits, there may be a decent entry for our favorite fruit company. As always, we’ll have to see how the market digests… the fund managers’ subsequent forced selling (during which, importantly, Apple’s huge potentially counterbalancing buyback program remain in effect), and, of course, Apple’s fiscal Q323 results coming on August 3rd.”
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