“So for the market rally to continue, you’re going to need to see a broadening out of earnings growth into other sectors of the market that are using AI to improve productivity.”
Investors are increasingly questioning whether the Magnificent Seven can replicate last year’s barnstorming rally, when an index of the stocks surged 106 per cent compared to the S&P 500’s 24 per cent gain.
The same group of stocks have continued to fuel sharemarket performance this year, with the S&P 500 equal weight index, which gives the same weight to all 500-plus stocks, up just 2.5 per cent, while the benchmark capitalisation index, which weights larger stocks more heavily, adds 6.7 per cent.
Insider selling
The group’s earnings season was mixed, with Meta, Amazon and Nvidia beating expectations, but Apple and Tesla reported some weakness.
And the move in recent months by company founders to reduce their stakes has added to market speculation that it could be time to take profits.
And insiders at the companies trimming their stakes in recent months has added to market speculation that it could be time to take profits.
Amazon founder Jeff Bezos this month sold 50 million shares in his company for $US8.5 billion, while the Bill & Melinda Gates Foundation Trust reduced its stake in Microsoft by about 3 per cent in the last quarter of 2023. Mark Zuckerberg sold $US428 million of Meta shares at the end of last year in his first share sale in almost two years.
Concerns that the megacap stocks have run too hard means that the technology sector remains the hedge fund industry’s largest “underweight” compared to the sharemarket, Goldman’s data shows. Within that, Microsoft, Apple and Nvidia ranked among the tech stocks with the largest decline in hedge fund popularity, while communication services stocks led by Snapchat were added.
However, the Magnificent Seven still account for a record 13 per cent of the aggregate hedge fund portfolio, and Goldman Sachs warned of the risks posed by the large degree of hedge fund crowding and gross leverage.
“These point to the risk of a violent unwind if the market environment shifts, as briefly occurred during the last several weeks of 2023,” said Goldman strategist Ben Snider.
While AMP’s head of investment strategy, Shane Oliver, acknowledged that investor enthusiasm around AI was getting “frothy”, he shut down comparisons between the current market and the tech bubble of the late 1990s.
Dr Oliver pointed out that the forward price-to-earnings multiple on the Nasdaq is at 32 times, and while that is elevated, it pales in comparison to the 100-times it was at the height of the tech bubble in 2000.
“Investors do need to be wary about jumping on the AI bandwagon as related chip making is highly competitive, it will take time for the economic benefits of AI to be realised, and the real winners may turn out to be different to today’s highfliers as occurred with many tech stocks a generation ago,” he said.
Goldman Sachs noted that hedge funds were reallocating capital to cyclical stocks and other pockets of growth amid strong US economic data and signs of improvement in global manufacturing.
