In recent analyses of trends in the stock market, concerns are emerging regarding the long-standing reliance on major technology companies as performance leaders. Bloomberg's report indicates that these firms, often referred to as the “Magnificent Seven” — which includes giants such as Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp., and Tesla Inc. — may not be able to maintain their historical notoriety as growth drivers within the stock market. This sentiment comes as the market transitions into what is termed the third year of the current bull market.
Historically, substantial earnings from these tech titans have buoyed stock index performances, particularly in light of the boom in artificial intelligence technologies. Recent forecasts, however, indicate an anticipated slowdown in profit growth for this group. Bloomberg Intelligence projects a combined profit increase of only 18% for 2025, a notable decrease from the previously expected 34% for 2024. Excluding Nvidia, which has emerged as a primary beneficiary of the ongoing AI advancements, the remaining companies within the group are expected to report a mere 3% earnings increase in the same year.
Julian McManus, a portfolio manager at Janus Henderson, spoke to Bloomberg, stating, “Mag Seven will not necessarily be the growth driver for the market that it has been over the last year or so.” This sentiment suggests a shift in investor strategy as market conditions evolve.
Furthermore, analysis reveals that the broader S&P 500, which encompasses a wider array of industries, expects a 13% earnings growth in 2025, an increase from 10% in the current year. As a result, investors are beginning to diversify away from technology stocks. Notably, the information technology sector experienced its largest outflow in six weeks, amounting to $1.4 billion, as reported by Bank of America. Conversely, small-cap stocks have seen inflows of $4.6 billion, reaching an annual record high of over $30 billion.
In this context, McManus anticipates better-than-expected growth in free cash flow and sees investment opportunities beyond the bounds of major tech firms. His focus includes energy producers and biotechnology, as well as companies engaged in design software for chip production, such as Cadence Design Systems Inc. The shift from traditional tech investments is underpinned by the observation that the “Magnificent Seven” have increasingly high valuations, trading at 41 times expected earnings, a peak not reached since early 2022.
Phil Blancato, CEO of Ladenburg Thalman Asset Management, expressed a preference for investing in the broader S&P 500 at a significantly lower forward earnings multiple, citing, “You only take too much risk when you’re in the bigger companies.” Other Wall Street analysts, including Michael Wilson from Morgan Stanley and Brian Belsky from BMO Capital Markets, corroborate these views, suggesting that the rally may expand to include sectors outside the tech paradigm.
Despite the downturn in optimism surrounding the big tech firms, one notable exception appears to be Nvidia. The company has gained considerably from surging demand for its AI computing accelerators. Projected earnings for Nvidia could reach $71 billion on $129 billion in revenue for the upcoming fiscal year, reflecting increases of 49% and 52%, respectively. This positions Nvidia as a standout performer not only within its cohort but also across the broader market, with its stock appreciating 193% this year.
As significant investments flow into AI-related capabilities from larger tech firms, with expectations that Microsoft, Alphabet, Amazon, and Meta will spend over $200 billion in capital for 2024 to enhance computing power, investor attention remains piqued regarding how these financial commitments will impact future profitability across the sector.
While the landscape for big tech companies appears to be changing, with predictions of slower growth in earnings, experts such as Scott Krohnert from Citigroup and Andrew Choi from Parnassus Investments suggest a continued allure associated with these stocks. Krohnert likened the safety offered by big tech firms to that of defensive sectors like consumer staples, highlighting their relative reliability in unpredictable economic climates.
In conclusion, the prevailing investment landscape indicates a cautious pivot from traditional tech firms as leaders, driven by projected earnings slowdowns and high valuations, while emerging sectors and companies like Nvidia might become focal points for future investment strategies.
Source: Noah Wire Services