The race could be over for the seven stocks that fueled the lion’s share of the stock market rally over the past year.
Jonathan Golub, chief U.S. equity strategist at UBS Investment Bank, downgraded six of the “Magnificent Seven”: Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META) and Nvidia (NVDA). ) – from overweight to neutral in a new research note published Monday.
His call comes in the form of the Magnificent Seven, who also includes Tesla (TSLA), just suffered its largest weekly loss in market capitalization in history. The seven Big Tech leaders are all off recent highs, a decline punctuated by a 10% single-day drop for Nvidia on Friday, its worst one-day price performance since March 2020, although the darling of AI rebounded 4% on Monday.
Golub, who rates S&P 500 sectors (^GSPC), not individual stocks, remains overweight technology outside of the six stocks mentioned in his note.
But for large companies that have grown earnings significantly over the past year, Golub thinks the tide could be changing and other areas are expected to outperform the S&P 500’s biggest stocks.
“Our downgrade of the Big 6 – from overweight to neutral – is not based on expansive valuations or doubts about AI,” Golub wrote.
“Rather, it is a recognition of the difficult compositions and cyclical forces that weigh on these stocks. These forces do not apply to other TECH+ companies or the rest of the market in the same way.”
The S&P 500’s earnings were largely driven by profit growth at large technology companies. This is expected to repeat itself in the first quarter reports, with FactSet forecasting that Amazon, Alphabet, Meta, Microsoft and Nvidia will combine for earnings growth of around 64%. Meanwhile, the other 495 companies in the S&P 500 are expected to report earnings declines of 6%.
But during the year this situation is expected to change.
FactSet consensus estimates show that earnings growth for these five companies is expected to finish the year at a pace just below 20% year-over-year in the fourth quarter, reflecting significantly slower growth than their previous pace.
At this point, the consensus expects the remaining 495 companies to grow their earnings by about 17% year-over-year, up significantly from their current growth rate.
“Investors attribute the rise in mega-cap stocks to animal spirits and the impact of AI,” Golub wrote. “However, our work indicates that strong earnings momentum (change in growth forecasts) has fueled this rise. Unfortunately, this momentum is collapsing.”
Tesla is expected to report quarterly results on Tuesday, with those from Meta, Microsoft and Alphabet due later this week.
This shift in where profits are growing the most could be “disruptive in the short term,” Golub added.
But given growing signs that the U.S. economy is growing faster than expected this year, Golub believes broadening earnings over the next year maintain his call for the S&P 500 to ends the year at 5,400…
