The Magnificent 7. Why the Weakness on Wall Street?
The Wild Ride
The Magnificent 7 have been spectacular throughout the entire 21st Century. However, the ride of late has been a bit wild. As you can see in the chart below, Tesla lost -66% in 2022 – one of the worst performers of the year. However, it is still the strongest performer of the seven companies, with a 9-fold increase in share price over the 5-year period. In 2022, the NASDAQ Composite Index plunged -33% compared to the S&P500 decline of -19.44%.
So far this year, the NASDAQ is up 21.6%, even with the -11.8% retreat we’ve seen since July 28, 2023. The Magnificent 7 is boasting share price gains of 34%-182% year to date, even with the sell-off of the last few days. (The high of the NASDAQ Composite Index was 16,212, which was set on Nov. 19, 2021.) Volatility is why regular rebalancing is so important. (More on that below.) Here’s where things stand at this time.
The revenue growth in almost all of these companies is still respectable (and eyepopping in the case of AI-company Nvidia). So, that doesn’t explain the pullback. What is causing investors to be skittish about these Wall Street All-Stars, and will it continue? In this blog, we’ll look at:
And here’s more on each point.
Most of the Magnificent 7 have reported their earnings, with the exception of Apple (Nov. 2) and Nvidia (Nov. 21). While the earnings of the companies that have reported remain noteworthy, particularly given the war, hardships and competition throughout the world, the net profit margins are moderating. Tesla is trading down -15% since it reported earnings on October 18, 2023. The company saw its revenue increase by just 9% in the 3rd quarter of 2023, after reporting double-digit growth for the past decade. $1.853 billion in net income was a drop of -44% from the prior year’s $3.3 billion.
Alphabet and Meta increased revenue by 11% and 23%, respectively, while retaining profit margins of 26% and 23%. Yet both saw a drop in share price after reporting their 3Q 2023 results. Meta’s guidance calls for 4Q 2023 revenue of $36.5-$40 billion, which is an increase of 13.5%-24.3% year over year. However, investors were spooked by CFO Susan Li’s admission that the war between Israel and Hamas was negatively impacting ad sales, which make up 98.5% of Meta’s revenue.
Ruth Porat, the President and Chief Investment Officer; CFO, Alphabet and Google, dodged the question of whether the conflict would impact ad spend in the 3Q 2023 earnings call. Is that why the sell-off of Alphabet Inc. (Google) was so severe (-9.5% over the last 5 days)? Is there something else at play?
“We’re valuing based upon what it will be worth in 3 years.” Wall Street insider explaining why he was excited to buy Nvidia at a 108 price-earnings ratio.
Prices of stocks are elevated and share prices of the Magnificent 7 are astronomical. As you can see in the Magnificent 7 Stock Report Card below, P/Es are light years above the average P/E of 17.
Yes, companies with high growth can support a higher P/E. However, like Nvidia, Tesla’s market cap soared to a trillion when the company had earnings of only $5 billion. It’s now worth $655 billion, down -35% (with a still elevated PE of 66).
The boom of Artificial Intelligence is real, as you can see in Nvidia’s revenue growth. However, competition, supply chain disruptions, restrictions on semiconductor sales to China (where 19% of Nvidia’s revenue comes from), a recession, war, and other headwinds could put plenty of obstacles in Nvidia’s road to earning its (almost) trillion dollar valuation. Whenever there is a game-changing innovation like AI, there are always fits and starts on the road to success, just as we saw with the Internet in 1999 – when many companies were completely wiped out, while others saw their share price plunge by 78% and take 15 years to recover. Nvidia looks like the one that will survive and thrive any fallout. However, macroeconomic challenges can cause all equities to go underwater.
The biggest headwind for Nvidia is the share price, which is trading at 97.41 times earnings. The share price has fallen $100 over the past two months – -19.4% .
What will happen over the next few weeks when Apple and Nvidia report earnings?
On Nov. 2, 2023, all eyes will be on Apple to determine whether the Chinese ban on the iPhone (and launch of a competitive Huawei smart phone) will make the company miss their earnings forecast. As I mentioned in my Sept. 9, 2023 blog, even if Apple hits their $81.8 billion revenue target, it will be -9.3% lower than the Sept. quarter of 2022. It’s hard to imagine that investors are going to be thrilled with this earnings report, unless there is an upside surprise that no one sees coming.
Nvidia is expecting another gangbuster earnings report. Judging by the amount of times AI was mentioned in the earnings calls and press releases of the other Magnificent 7, nothing is going to prevent the company from meeting or exceeding earnings expectations, when it reports on Nov. 21, 2023. However, as we’ve seen in the other reports, the analysts are looking for any sign of weakness in the forward outlook. As the outlook becomes less certain, it’s difficult to justify such lofty share prices . Whale investors are forward-thinking.
The Magnificent 7 have soared to interstellar heights and have sunk back to Earth multiple times over the past five years. That is why capturing gains and rebalancing is such an important tool in our wealth plan. By using our pie chart system, your slices prompt you to capture gains when stocks shoot the moon, and buy low when they crash. Rebalancing 1-3 times a year is a buy low, sell high plan on auto-pilot that takes the emotions out of investing, and prompts us to employ this time-proven investing rule.
The Magnificent 7 companies are so strong because they are embedded in every part of our lives. I’m writing in a Word document, while looking up data on MSN and Google search, from my MacBook Air and iPhone. All of these companies are remodeling every room in their business with artificial intelligence. Electric vehicles are the fastest growing vertical in the auto industry.
However, war, unsustainably high post-pandemic debt loads, inflation, supply constraints and economic uncertainty will impact almost all of these businesses. Tight budgets curtail consumer spending, which causes businesses to cut their ad spend. It is rare for a company to swim upstream, when all of Wall Street is crashing.
It’s not a matter of jumping all in or all out. Market timing doesn’t work. However, acting our age and overweighting safe when there are economic storms on the horizon is a sound strategy – and is something we’ve seen the whales do over the last two years, as they trim back on their at-risk positions and move into a safer yield. (Bonds are tricky, but can be safer if we adhere to a few, simple rules.)
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.