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Checking In on the Health of the “The Magnificent Seven”
Enrique Abeyta
March 15, 2024
One of the most significant topics in the stock market in the last year has been the performance of a group of companies dubbed the "The Magnificent Seven.”
This group consists of seven large US technology companies, some of Earth's largest and most successful companies. As a reminder, the companies are Apple Inc. (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), Amazon.com, Inc. (NASDAQ: AMZN), NVIDIA Corporation (NASDAQ: NVDA), Alphabet Inc. (NASDAQ: GOOG), Meta Platforms, Inc. (NASDAQ: META) and Tesla, Inc. (NASDAQ: TSLA).
Alphabet and Meta are the companies formerly known as Google and Facebook, respectively.
They have been a major focus as they have become a huge percentage of the US stock market and are also huge relative to ANY stock market.
As of yesterday, they had a combined market capitalization of $13.5 trillion.
Below is a list of all the global stock markets ranked by market capitalization…
You can see that these seven companies have a larger market capitalization than all the publicly traded stocks in the EU or China. They are massive!
They also powered the performance of the S&P 500 index last year. In 2023, it was up an impressive +26%, but without the contribution of these stocks, it would have been up only +8%.
Every stock had outstanding performance, but in 2024, the performance was less strong.
This table shows the seven stocks and their stock price performance in 2023 and 2024 year-to-date…
Looking at the chart, you will see that the stocks were up an incredible +111% on average in 2023! The worst-performing stock was up more than +50%.
In 2024, though, the performance is much more subdued, and in a significant departure, two of the stocks – AAPL and TSLA – are down. TSLA is down substantially.
What is going on, and how worried should investors be?
These stocks comprise 31% of the S&P 500 index, so they certainly can't be ignored.
There has been a lot of discussion of why these stocks have done so well. Some investors argue that they are part of a new stock market “bubble.”
We have written extensively on the subject and clearly understand why the stocks have done so well. The answer is EARNINGS REVISIONS.
Here is a table showing the EPS earnings revisions for the seven stocks, and we have ranked it by the 2023 stock price performance…
At the top of the table, you can see how the best-performing stocks – NVDA and META – mapped very well with the stock price performance.
You will also see an anomaly: two companies showing negative revisions—AAPL and TSLA—but still showing strong price performance. Remember the 2024 price performance of those stocks from the previous chart?
Here is an analysis showing the last six months of EPS earnings revisions mapped against the 2024 stock price performance…
This table is also ranked by the earnings revisions. Notice the pattern?
In 2024, the worst stock is TSLA, which had a large negative earnings revision. The two stocks with flat earnings revisions—GOOG and AAPL—are flat or down some.
There is much more to the equation (and we will discuss more in an upcoming HX Daily). Still, the relationship between earnings revisions and stock performance is clear.
This leads to the obvious question: Do we think that these companies will continue to see positive earnings revisions?
Two of the companies have seen revisions driven by fundamental factors.
We are all familiar with NVDA's story and the AI boom that has driven demand for their chips. We think that eventually, that will cool off, and we have written about that subject here, but we don't think it will fall off a cliff soon.
TSLA has been hit hard by price cuts as it looks to expand its overall market and defend its market share. It is hard for us to judge whether the negative revisions will continue, but TSLA is by far the smallest of the seven, with a market capitalization less than half that of the next smallest member. The stock market is also doing fine despite TSLA’s stock performance.
For the rest of them, we think there is an interesting factor to consider…
All these companies grew immensely during the COVID period as they saw an explosion in their businesses. They were struggling to keep up with the digital demand!
As the economy normalized, though, they realized that their expenses were too high. Beginning in late 2022 and throughout 2023, they engaged in significant job cuts. Here is a table showing the publicly announced job cuts by company…
Four of these companies had substantial job cuts. For GOOG, META, and MSFT, the cuts were a double-digit percentage of their total workforce. The AMZN job cuts were much more minor, as they have a huge part-time workforce, but these cuts came overwhelmingly from their more expensive full-time employees.
With a stabilizing economy, an AI boost to demand, AND these job cuts, these companies have been able to post strong earnings momentum. These benefits usually flow through for at least 18 months or more.
As a result, we think these companies will continue to see a tailwind to their earnings.
How about the other three companies – NVDA, AAPL, and TSLA?
NVDA is ADDING jobs, and they should! They are seeing revenue growth that is probably equal to all their competitors combined…
A couple of weeks ago, AAPL announced that it would close its electric vehicle division. This had much hype several years ago, but AAPL is throwing in the towel. It is only 2000 of their 161,000 employees, but we won't be surprised to see more cuts coming.
Finally, we think the bottom in TSLA stock could likely be set when we see the job cuts coming out of it!
Looking at the backdrop for earnings revisions in the rest of 2024 for "The Magnificent Seven," we remain optimistic. As the earnings revisions go, so should their stock prices and potentially the rest of the stock market along with them.
NOTE - We have published an update on our FREE IDEA from last week. You can read that update here…
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