For the first time the Magnificent Seven have market sentiment against them. Investors will no longer just settle for exorbitant profit growth or billion-dollar investments in artificial intelligence. The time has come to live up to high ratings, with a high risk of disappointment. The five companies arrive at the meeting with several open fronts and not only the shared one.
For example, Alphabet, the owner of Google, arrives at the meeting with the threat of being dismembered by the US Department of Justice. The company is accused of monopoly for its search engine, for video and advertising. And more and more journalistic information suggests that the Administration will adopt the toughest decision, as it did with the Rockefeller oil company, Standard Oil, in 1911 or in 1980 with AT&T. With this panorama, the company’s results take a backseat.
For Apple, it will be the accounts that have to confirm that the drop in demand for its iPhones is only a temporary toothache. The company a few weeks ago committed that all its geographies and products would grow in the coming quarters. Some analysts already consider that the apple company’s prospects are too optimistic.
The market’s concern about Amazon revolves around capital expenditure and Meta is waiting for some news related to its developments in AI. Each company has its problems, but the common front is the demonstration of AI advances for their businesses. Last earnings season, Microsoft gave quite a scare. The company was the first to deploy AI in many of its software functions and caused disappointment. The performance did not match the millions of dollars of investment. Revenue from its Azure division fell short of expectations and fears of an AI bubble suddenly emerged.
For the five aces of the Magnificent Seven, the forecasts contemplate a joint investment in the new technology of 56,000 million dollars. Some experts are already warning that huge margins will be affected. “Huge margins are likely a thing of the past, at least in the short term,” say Bloomberg Intelligence’s Gina Martin Adams and Michael Casper, pointing to higher capital spending as responsible for lower profits.
The consensus of Bloomberg It expects the average profit of the five companies to increase by 13% compared to last year. This would go from an increase of 25% for Amazon to 4.3% for Microsoft.
Why are your results important?
The Magnificent Seven represent just over 23% of the capitalization of the S&P 500, “due to their high weight in the indices, their behavior will greatly condition their behavior, and may determine the monthly closing trend in the US stock markets and, out of “sympathy”, also from the Europeans”, comments from Link Securities.
The rises of much of the last two years of the S&P 500 are explained by the technological giants, thanks to the relentless expansion of profits and a market willing to continue paying higher multiples. And that is the underlying problem. Apple trades at 32 times estimated earnings for the next 12 monthscompared to an average of 20 times in the last decade, according to Bloomberg data. Microsoft trades at 33 times, compared to an average of 25 times.
Distrust has settled in the market. Since peaking on July 10 after a 22% rally to start the year, the Bloomberg Magnificent 7 index, made up of the five companies mentioned plus Meta and Tesla, has fallen 2%. The S&P 500 recorded an advance of 4%, but the public services, real estate, financial and industrial sectors accumulated an increase of more than 10%.
There are two points in favor of the Magnificent Seven narrative. Tesla, one of the members of the select club, published results last week and surprised the market with results and business prospects. And this week is important, but it will not be as critical as when Nvidia presents on November 20.
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