U.S. stocks are stumbling this month amid worries over stretched valuations, with the S&P 500's concentration in Big Tech making it vulnerable to pullbacks like the one seen Thursday.
Most of the Big Tech stocks known as the Magnificent Seven trade at lofty valuations well above the highly valued S&P 500 - which has heavy exposure to the group. Yardeni Research tracked Big Tech's forward price-to-earnings ratios for the next 12 months in the chart below, including a comparison of the valuation multiple for the S&P 500, in a Nov. 5 note.
YARDENI RESEARCH
"The stock market is not cheap," said Chris Galipeau, senior market strategist at the Franklin Templeton Institute, in a phone interview. "The margin of error that we have here is very small," he said, adding that expectations for earnings next year have to remain "robust."
"Anything that causes a problem with that, or causes people to question that, that will be a little bit of a problem," said Galipeau.
The stock market was selling off Thursday, after a fresh Challenger report showed layoffs surged in October in the U.S. In absence of the government data on the economy due to the longest shutdown in U.S. history, investors are paying more attention to alternative sources of economic data such as Thursday's report on layoffs from Challenger, Gray & Christmas.
The Dow Jones Industrial Average DJIA was down 0.5% on Thursday afternoon, while the S&P 500 SPX fell 0.7% and the tech-heavy Nasdaq Composite COMP dropped 1.3%, according to FactSet data, at last check.
"Most of October's announced layoffs occurred in the warehouse and technology industries," Yardeni Research said Thursday, in a separate note referencing the Challenger report. "Automation and robotics are boosting productivity in warehousing. AI is doing the same in technology."
The Roundhill Magnificent Seven ETF MAGS was posting a bigger drop of 1.6% Thursday afternoon, as shares of Nvidia Corp., (NVDA), Tesla Inc. $(TSLA)$, Amazon.com Inc. (AMZN), Facebook parent Meta Platforms Inc. (META) and Microsoft Corp. $(MSFT)$ all dropped sharply.
Google parent Alphabet Inc. $(GOOGL)$ $(GOOG)$ and Apple Inc. $(AAPL)$ were the only two stocks in the ETF's portfolio that were trading in positive territory on Thursday afternoon, according to FactSet data, at last check.
The S&P 500 has outsized exposure to Big Tech stocks, a concentration that makes some investors a bit nervous after their huge gains in the current bull market.
With their recent stumble, the S&P 500 has dropped 1.3% so far in November, while the Roundhill Magnificent Seven ETF has slumped 2.1% this month, according to FactSet data.
Several Big Tech companies reported third-quarter earnings in late October, with investors focused on their heavy spending on generative artificial intelligence as AI enthusiasm has fueled the group's gains.
Big Tech stocks have driven capex spending in the U.S. in recent years and "it feels like it's hitting another gear here now," said Galipeau. A slowdown in that "massive spend" on AI could raise concern in the stock market, he said, but the quality of Big Tech earnings has generally been "excellent," with free cash flow "as good as it's ever been."
Stocks have pulled back this month in stocks, but the bull market has remained intact, with the S&P 500 up 14.8% this year, according to FactSet data.
The S&P 500 has rallied year to date as its underlying drivers have been "resilient," including "strong" company earnings for the third quarter based on results reported so far, said Galipeau. The stock market "cares about earnings growth and it's been better than people expected."
While hyperscalers in Big Tech have been grabbing attention with their massive spending in the AI boom, he said he's seeing some signs of artificial intelligence helping companies in other industries become more efficient, productive and profitable.
All eyes will be on Nvidia's third-quarter earnings results due out later this month.
"We are still two weeks from the very important Nvidia earnings," said Louis Navellier, chief investment officer of Navellier & Associates, in an emailed note Thursday. "Strength there might be the catalyst to reaffirm the AI narrative."
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