Do the Magnificent Seven Still Rule the Market? Dear Reader, Back in 1960, there was a film called “The Magnificent Seven.”
The film was a Western-themed take on famed Japanese director Akira Kurosawa’s classic “Seven Samurai,” and it follows seven gunfighters who were hired to liberate a village from oppressive bandits.
Starring a host of current and future Hollywood superstars (Yul Brenner, Steve McQueen, Charles Bronson), the movie became known as one of the greatest Western films ever made.
In fact, thanks to its popularity, the film was remade in 2016 with big names such as Denzel Washington and Chris Pratt.
Flash forward to 2023, and the “Magnificent Seven” took on a whole new meaning.
Bank of America analyst Michael Harnett began using the phrase to describe a group of mega-cap tech growth stocks. The group includes Google parent Alphabet, Inc. (GOOG), Amazon.com, Inc. (AMZN), Apple, Inc. (AAPL), Microsoft Corporation (MSFT), Meta Platforms, Inc. (META), NVIDIA Corporation (NVDA) and Tesla, Inc. (TSLA).
These elite Big Tech companies have been dominating the broader market over the past couple of years with their strong returns. That’s because they’ve been at the forefront of disruptive innovation in areas like electric vehicles (EVs), cloud computing and artificial intelligence.
For example, in 2023, the S&P 500 finished with a 24% gain, and technology stocks led the overall market higher. You can see how the Magnificent Seven performed in the chart below...  Source: Statista I should point out that the Magnificent Seven are all mega-cap heavyweights. And since the S&P 500 is weighted by market capitalization, these stocks accounted for about 28% of the S&P 500’s weighting at the time. So, their performances have a powerful effect on the broader market. And, although the rally did broaden out in the second half of the year, there’s no denying the influence these stocks have in the market.
However, change is in the air this year, and money is on the move. Out of the seven companies, only four had good earnings reports this earnings season.
NVIDIA, which we will talk about down below, is the latest to beat. The other three, which we covered in a previous Market 360 at the beginning of the month, are Meta, Amazon and Microsoft. Let’s quickly recap how they did… - Meta announced a revenue increase of 24.7% year-over-year to $40.11 billion while earnings per share surged 202.8% year-over-year to $5.33 per share, up from earnings of $1.76 per share in the same quarter a year ago.
- Amazon announced adjusted earnings per share of $1.00 per share and revenue of $169.96 billion, which bested analysts’ estimates for $0.80 per share and $149.2 billion in revenue.
- Microsoft reported earnings of $2.93 per share on revenue of $62.02 billion, up from $2.35 per share and $50.12 billion.
However, only one of them is the clear market leader.
I’m talking about NVIDIA.
So, in today’s Market 360, I’m going to explain why NVIDIA is the clear leader and recap its latest earnings report. I’ll also share where money is moving to and how you can find the winners in this batch. What Makes NVIDIA the Market Leader NVIDIA is a leading computer graphics company – it’s been in the business for more than two decades.
The company first invented the graphic processing unit (GPU) back in 1999. From video games to professional visualization to data center and automotive applications, NVIDIA’s graphics cards enhance the processing capability of its users’ computers.
NVIDIA has since emerged as the dominant player in the artificial intelligence industry.
As the world’s top technology companies compete in the AI race, they turn to NVIDIA’s processors to build out their products and services. The company’s products are in such high demand that AI developers often have to wait months to be able to use NVIDIA processors on the cloud.
All of this adds up to NVIDIA being the new and unquestionable market leader.
After briefly dipping into negative territory in the first week of 2024, it’s been off to the races. The stock is up more than 59% year-to-date and briefly eclipsed a market capitalization of $2 trillion during Friday’s trading.
Turning to the company’s financials, NVIDIA released its latest earnings report for its fourth quarter in fiscal year 2024 on Wednesday after the closing bell. And as I expected, it posted blowout quarterly results, and the stock soared higher on Thursday.
NVIDIA reported revenue soared 265% year-over-year to a record $22.1 billion. Data center revenue surged 409% year-over-year to a record $18.4 billion. The analyst community expected total fourth-quarter revenue of $19.14 billion.
For context, NVIDIA reported $27 billion in revenue for the entire year in 2022.
Fourth-quarter earnings jumped 486.4% year-over-year to $5.16 per share, compared to $0.88 per share in the same quarter a year ago. Analysts expected earnings of $4.29 per share, so NVIDIA beat estimates by 20.3%.
For fiscal year 2024, NVIDIA also reported total revenue of $60.9 billion, or 126% annual revenue growth, and earnings of $12.96 per share, or 288% annual earnings growth. These results also topped expectations for revenue of $55.15 billion and earnings of $11.52 per share.
Company management commented, “Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations.”
NVIDIA anticipates this demand will continue to add to its top and bottom lines. For the first quarter in fiscal year 2025, the company expects revenue of about $24.0 billion, which represents 268% year-over-year revenue growth. Money on the Move Now, in the wake of these results, NVDA rallied by about 16% on Thursday. And consequently, it pulled the rest of the market higher. The S&P 500 rose 2.1% to a new record high, the Dow jumped 1.8% and the tech-heavy NASDAQ soared nearly 3%.
So, clearly, as I said, NVIDIA is the new market leader. But money is on the move in this market, and other stocks are beginning to enter into the spotlight.
Now, I’m not suggesting that you don’t own any of the Magnificent Seven. In fact, as you can see below, six of the Magnificent Seven stocks are still considered “Buys” in my Portfolio Grader.  However, it’s clear to me that money is flowing into other stocks that are prospering from explosive sales and earnings growth. Specifically, money is starting to pour into small- and mid-cap stocks. But to get the full picture of what’s going on, we have to look back at last year… Small-cap stocks were on an absolute tear at the end of 2023.
From the late October lows through yearend, the small-cap Russell 2000 soared nearly 24% higher. Thanks in part to this surge, the Russell 2000 ultimately ended the year 15% higher. While this was an impressive performance, small- and mid-cap stocks still largely underperformed their large-cap peers, as the S&P 500 posted a 24% gain in 2023.
That’s a trend that’s continued in the early stages of 2024. The Russell 2000, as represented by the iShares Russell 200 Index ETF (IWM), has consolidated some of its late 2023 gains, with the index down slightly negative year-to-date. The S&P 500, as represented by the SPDR S&P 500 ETF (SPY), is up nearly 7% year-to-date.  But for small- and mid-cap investors, this divergence is great news.
The fact is small- and mid-cap stocks are not overvalued yet – and the recent consolidation could serve as a “launching pad” that propels these stocks higher in 2024 and beyond.
I should add that there’s $6 trillion sitting on the sidelines in money market investments and CDs, which I expect to pour into the market when the Federal Reserve starts cutting key interest rates in the next few months.
So, there is plenty of fuel to propel small- and mid-cap stocks dramatically higher in the upcoming weeks and months. Picking the Next Big Winners The reality is that there are great opportunities in small- and mid-cap stocks that can outperform these heavyweights this year. I’m talking about quality stocks with superior fundamentals that will continue to boast strong earnings and sales growth.
But with thousands and thousands of stocks to invest in, it can be hard to find these fundamentally superior stocks.
That’s where my Accelerated Profits service can help.
My current Buy List is characterized by 36.8% average forecasted sales growth and 204.6% average forecasted earnings growth. My Accelerated Profits stocks have also benefited from positive analyst revisions.
My Buy List is also chock-full of small- and mid-cap stocks. And given their superior fundamentals, I expect money to flow into these names. But of course, I didn’t just pick these names out of a hat…
The system I use in Accelerated Profits helps me pinpoint companies that are primed to post strong earnings results – sending their stocks soaring as a result.
To learn how I use a series of AI algorithms to sift through massive amounts of data to find the best stocks, click here.
(Already an Accelerated Profits member? Click here to log in to the members-only website now.) Sincerely, |
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