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| Tech Titans on Trial: Are the "Magnificent Seven" Showing Cracks? |
The tech giants, once the market's undisputed darlings, are facing a moment of truth. After years of breakneck growth, investors are demanding perfection, and even minor stumbles are sending shockwaves through Wall Street. This earnings season, the pressure is on like never before, and for the "Magnificent Seven" - the elite group of tech companies that have fueled market rallies - only flawless performances will suffice.
The scene has been dramatic. Facebook parent Meta Platforms, riding a wave of strong sales growth, a first-ever dividend, and a hefty share buyback, soared 20% to set a record high. Amazon followed suit, its robust holiday sales pushing shares up 7.9%. But for others, even positive results weren't enough. Google parent Alphabet, Microsoft, and Apple, despite exceeding analyst expectations for profits and sales, stumbled as key segments underperformed. The result? Alphabet plummeted 7.5%, Apple dipped 0.5%, and Microsoft took a hit before recovering to end the week flat.
Why the harsh judgment? As George Maris, investment chief at Principal Asset Management puts it, "It's because it's crowded at the top. Anything perceived as less than bulletproof gets the boot." Tech stocks, fueled by bets on a coming AI boom, have seen meteoric rises, pushing the entire market to record highs. Now, investors are scrutinizing every detail, demanding evidence that lofty valuations are justified.
The stakes are high. Without the "Magnificent Seven," the stock market picture looks bleak. Excluding Tesla's recent disappointment, these tech titans are projected to deliver a whopping 62.8% jump in earnings for the fourth quarter, compared to an expected 8.6% decline for the rest of the S&P 500. That 1.6% overall growth hinges heavily on their performance.
But the question remains: when will AI investments, touted as the engine of future growth, translate into actual revenue and profits? So far, the results are underwhelming. Add to that concerns about rising interest rates and waning hopes for near-term cuts, and the tech sector finds itself under a cloud of uncertainty.
Yet, some investors remain unfazed. They see short-term volatility as noise, focusing on long-term potential. Nael Fakhry, manager of the Osterweis Fund, which owns Microsoft, Alphabet, and Amazon shares, exemplifies this sentiment: "We're not going to get overly exercised... unless the fundamentals have really changed."
However, not everyone shares this optimism. Rob Arnott, chairman at Research Affiliates, warns that even if AI fulfills its promises, buying tech at lofty prices might lead to poor returns. "Narratives are powerful," he acknowledges, "but they can also be fully priced in."
