Outlook on Big Tech following recent turbulence

The Magnificent Seven has suffered a growing selloff over the last week. The stock values of all seven of these well-known companies—Apple, Amazon, Microsoft, Tesla, Meta, Alphabet, and Nvidia—have now dropped below where they were on July 1st:

Figure 1.0

(Figure 1.0 Source: IG)

Nevertheless, it is only Tesla that is down for the year, as shown in Figure 2.0. Whereas for the remaining six, since January 1st their share prices are up year-to-date. The remaining six have so far recorded an average return of 34%. Nvidia, which has more than doubled in value while having dropped over 30% from its record high, is a big contributor to this gain.

(Figure 2.0)

(Figure 2.0 Source: IG)

What is the difference in their valuations?

Collectively, these equities often trade at premiums, sometimes double-digit multiples, though occasionally they trade at even greater ratios. The PE ratios for these seven equities on July 16, when the latest selloff started, and August 8, when the markets stabilised, are displayed in the table below:

(Figure 3.0)

(Figure 3.0 Source: IG)

When we consider the Magnificent 7 as a whole, we may notice that on July 16, its average valuation was 13.6% more than the five-year average. Amazon was remarkably 26% below its average, while Tesla was the most extreme, at 44% over its 5-year average.

By August 8th, the group was trading at a 2.2% discount to the 5-year average as a result of the stock price decreases driving these values down. This had at least assisted in taming some of the exaggerated investor excitement surrounding these names, even if it was far from cheap. At the extremes, Amazon's value had fallen to a 45% discount, while Tesla was still about 30% above its average.

What does this indicate about the Magnificent 7's future?

It seems doubtful that the prevailing phase of stock market volatility has ended. The volatility index is still high in comparison to its mid-July levels, even if it has dropped somewhat from its peak on August 5th. Stock markets often have their worst months in August and September, and investors are still concerned that the yen carry trade will continue to unwind and cause further volatility.

However, the Magnificent 7 are no longer pricing in too optimistic assumptions as they were in mid-July. These companies continue to be worldwide titans, enjoying robust levels of both cash flow and product demand. As high-growth stocks, they are unlikely to trade at low valuations outside of periods of crisis; however, the recent correction may present an opportunity for investors who felt they were left out of the sector's stellar performance this year to reevaluate the sector at more affordable valuations.

(Sourced including data from IG)