PID 3889


Investment Commentary: Meet the New Boss.. Same as the Old Boss?

By Robert F. Taylor, CFA®

At first glance, the lyrics “meet the new boss, same as the old boss” from The Who’s song “Won’t Get Fooled Again” aptly captures the ongoing dominance of the Magnificent Seven (Mag 7) stocks in today’s financial market. This group—consisting of Apple, Amazon, Microsoft, NVIDIA, Alphabet, Tesla, and Meta—has shown extraordinary earnings growth and price performance over the past few years. In 2023, they were solely responsible for all the earnings growth within the S&P 500, delivering a staggering 43% increase. In stark contrast, the remaining 493 companies in the index experienced negative earnings growth. This trend continued into the first quarter of 2024, marking the fifth consecutive quarter in which the S&P 500, excluding the Mag 7, saw a decline in earnings growth.

However, there is a growing sentiment that the term “Mag 7” may be approaching obsolescence. This is supported by data showing that in 2023, each member of the Mag 7 surpassed the index’s price performance by at least twofold, with the collective group achieving an average performance over five times greater than that of the index. Yet, as of mid-2024, Apple and Tesla are lagging the index, while Microsoft’s outperformance has shrunk to just one percentage point. The broad dispersion in performance within this group suggests that the once-unified Mag 7 may no longer be a fitting label.

The idea that the moniker should be retired following Q1 results is further supported by the diverse performance within the group. In aggregate, profits for Apple, Amazon, Alphabet, Meta, Microsoft, NVIDIA, and Tesla grew by 48% year-over-year, driven by a 14% increase in sales and a 521-basis point expansion in margins to 22.8%. However, these combined results mask wide disparities. Sales growth for Meta (+27%), Alphabet (+15%), and Amazon (+13%) exceeded expectations, driving year-to-date share price gains of 39%, 25%, and 21%, respectively. As seen in the table below, NVIDIA’s share price has soared nearly 145% year-to-date, with first-quarter sales of $26 billion, an increase of 260% from the previous year. In contrast, Apple’s sales fell by 4% and Tesla’s revenues dropped by 9%, resulting in stock price returns of 2% and -29%, respectively. Notably, Tesla has now fallen to the 12th largest stock in the S&P 500 index.

So, who’s the new boss?

As investment spending in artificial intelligence (AI) is still in its early stages, the mega tech companies poised to benefit most include those involved in AI infrastructure (NVIDIA), AI-enabled revenues (Amazon, Alphabet, Meta), and potential long-term productivity gains (Microsoft).

Management commentary from large tech firms underscores the strength of the AI spending cycle. Following a quarterly low of $14 billion in Q1, Amazon plans a significant increase in 2024 capital expenditures to support AI workloads and capabilities in AWS. Meta has raised its capex budget to support AI initiatives, projecting $35-$40 billion compared to the previous $30-$37 billion. Alphabet expects quarterly capex to stay at or above Q1 levels of $12 billion to drive AI innovations in advertising.

These investments in AI represent some of the largest cash infusions in a specific technology in Silicon Valley history. They also hold the potential to further entrench the biggest tech firms at the center of the U.S. economy, but we see benefits beginning to accrue to other companies outside the named tech behemoths. Computer server manufacturer Super Micro Computer (+170% YTD) is the best performing stock in the S&P 500 year-to-date, benefiting from the investment in AI infrastructure. Palantir (+39%), First Solar (+71%), and NextEra Energy (+22%), are also experiencing accelerated revenue and earnings growth on the back of AI investment.

Interestingly, Apple, which had been lagging in 2024, rose 7.5% to an all-time high on June 11th after unveiling its “Apple Intelligence” AI platform and suggesting that this innovation could drive the next iPhone upgrade cycle. This development indicates that even companies with slowing growth may find new opportunities through strategic AI investments.

The Magnificent Seven stocks have been instrumental in driving market performance, but their diverging fortunes indicate a potential shift. As AI investment surges, companies like NVIDIA, Amazon, Alphabet, Meta, and Microsoft are poised to capitalize on this trend, underscoring their ongoing relevance. However, the varying performances of Apple and Tesla suggest that the group’s once-uniform dominance is fracturing. The rise of other companies benefiting from AI highlights the broadening landscape of tech-driven growth. This evolving dynamic suggests that the “Mag 7” moniker may soon become obsolete as the market continues to diversify and new leaders emerge.

Shannon Dermody

Shannon DermodyTEST

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