Microsoft has hit the headlines twice of late in relation to milestones around its valuation.
It kicked off the year by briefly overtaking Apple as the most valuable publicly listed company globally – a feat it has managed on a handful of occasions now.
It followed that up by becoming the second company after Apple to pass the $3 trillion valuation mark.
Three trillion dollars – that’s a three with 12 zeros after it!
It has put the spotlight on the massive valuations around some tech companies in the US – companies that incidentally have been driving much of the growth in markets in the past year.
Specifically, seven of them – which have become colloquially known as the ‘Magnificent Seven’ mega cap stocks.
But how reliant are the markets on these stocks and what impact could it have globally if they suddenly went into retreat?
Seven emerge
There was an extraordinary bounceback in stock market index valuations in 2023.
Having spent 2022 on a mainly downwards track, analysts and investors were praying for a better year.
And they weren’t disappointed. By December just gone, stocks globally were at or approaching all time highs.
It was largely driven by the US where the Nasdaq and S&P 500 powered back, helped to a large degree by tech stocks that had guided the market down in 2022.
And within that cohort, there was a further concentration on the seven – Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta Platforms and Tesla.
However, in the later part of the year, the recovery broadened to other parts of the market.
Sentiment was being influenced largely by the narrative around interest rates.
While Central Banks continued to hike rates throughout 2023, market participants – who tend to be forward looking in their nature – were already eyeing up a rate cut.
By year end, there was near unanimity that the European Central Bank would be cutting rates by March with the US Federal Reserve following shortly behind.
Investors hit the jackpot.
Seven (or six?) return
As 2024 came around, the sentiment around rate cuts very quickly shifted.
March was no longer regarded as a realistic date for an initial rate cut from the ECB – something it itself had continually cautioned against.
And markets responded with a retraction, and it was wide-ranging.
Even the seven saviours of the previous year appeared to take a hammering, led by Apple, which was bearing the brunt of two ratings downgrades on concerns around weakening demand for the iPhone.
But an interesting pattern has re-emerged since.
Investors appear to have reverted to their reliance on the Magnificent Seven – or six of them at least – with Tesla dipping on a poor sales outlook, despite cutting prices for its cars.
“Nvidia has been a particular highlight, rising by more than 6% after announcing three new AI chips, while Apple recouped some of its losses,” Richard Hunter, Head of Markets at interactive investor noted.
“The likes of Alphabet, Amazon and Microsoft also saw renewed buying interest amid the ongoing debate surrounding the timing and levels of interest rate cuts, which are expected to kick in later this year should inflation finally be tamed,” he said.
Performance in the spotlight
The focus turned to the bottom line this week with a batch of the seven companies publishing results.
It was a mixed bag, with Facebook parent Meta reporting a tripling of quarterly profit and a surge in users as well as its first dividend for shareholders, which sent its share price surging.
Microsoft also performed particularly well, lifted by demand for Artificial Intelligence tools which boosted its sales.
At the other end of the scale was Apple which, despite reporting a return to revenue growth, saw its share pricing faltering amid concerns about its performance in the all important Chinese market.
While the generally impressive results have helped to largely maintain the hype around the stocks, it has also raised the bar around performance for the rest of this year and subsequent years.
They’re unlikely to replicate the focus that came from the launch of ChatGPT in 2022, a move that saw investors piling into the top tech stocks.
But there is no immediate sign that investors are about to turn their backs on the sector and start dumping stocks that they fear could be over-valued.
Back in vogue for 24?
So does that mean that the Seven are back back in fashion for the remainder of the year, or at least until some clarity emerges on interest rates?
Not necessarily, says Aidan Donnelly, Head of Equities with Davy, who says the moves must be viewed in a broader context.
“Those seeking to spot the early trend for the rest of the year might be a bit disappointed, because so far there is not a lot to discern from the tea leaves,” he said.
“The narrative has changed if not daily, then certainly every few days, with the breadth of stock markets getting wider initially, only to tighten back into focus on those seven stocks that were the only game in town in 2023,” he added.
He noted the recent exception in Tesla which, he said, had hit ‘a pothole in the road’.
But there is growing concern around the prospect of too much of the spotlight falling on a narrow range of stocks.
There are tentative fears that a market rally that’s not broad-based could backfire – particularly if the concentration is in one sector that can suddenly become vulnerable.
Some veteran traders have memories of the 1990s when market gains were driven by another small basket of tech companies.
Known as the ‘Four Horsemen’, they included Cisco, Dell, Intel and Microsoft.
In that scenario, the enthusiasm spread to every internet related, speculative start-up eventually culminating in one of the best-known market crashes in trading history – the dot com bust in the early 2000s.
Analysts caution against drawing too many parallels to the current situation, though.
The current batch of seven are more diversified in their business models, although there is a risk that market gains are being tied to one particular innovation.
In this instance, it’s Artificial Intelligence and developments arising from that sphere.
Wider outlook
The path of interest rates will once again be the focus for investors as the year progresses.
The inevitable disappointment should rates not start to fall back in March will likely result in a selloff, but the focus will then turn to subsequent meetings and whether cuts are on the cards down the road.
The narrative could change as the months pass, though, with geopolitical developments playing a more significant role when it comes to market sentiment.
Although the conflict in the Middle East has not had as significant an impact on global financial markets as the Russian invasion of Ukraine had on oil prices, inflation and ultimately interest rates, investors and Central Banks are becoming more mindful of the potential for upset arising from unrest on a number of fronts.
“Members of the ECB will be aware that the threat of inflation coming back to life is potentially greater in their region – not least of all from developments in the Red Sea,” Aidan Donnelly pointed out.
He said the Houthi campaign against shipping going through the Suez Canal had broadened the macro impact of the Middle East conflict, with upward pressure on shipping costs as well as costs associated with risk and insurance ultimately being passed on to consumers in the form of higher goods costs.
“This is a fact not lost on the ECB and potentially explains its desire to move any talk of rate cuts further into the year,” Mr Donnelly said.
Should Central Banks be forced into a holding position on interest rates or even raising rates further – currently viewed as a highly unlikely scenario – all bets would be off for stock and bond markets.
However, with ECB President Christine Lagarde telling reporters that rates would likely start coming down in the summer, it looks like a safe bet that it is going to happen at some point in the coming months.
The question is what investors will focus on then.
Do they go back to actually analysing companies for performance and how will the ‘magnificent’ ones shape up in that environment?
Judging by their recent profitability, they look to be a safe bet for a while at least with developments in AI powering the way ahead.
But Tesla is a salutary tale. Once the darling of the stock markets, particularly during the pandemic when it was included in the S&P 500 at the end of 2020, its stock has taken a battering in recent weeks, losing about 25% of its value since the start of the year.
The company still has a market capitalisation of close to $600 billion but warnings of slower sales, and the eclipsing of the brand by Chinese competitor BYD – accompanied by the share price bruising – just goes to show how sentiment in the sector can turn on a dime.
