MW 'Magnificent Seven' up for another bull run? What to expect from technology stocks in 2024.
By Isabel Wang
Opportunity still lurks in the next rung of AI adopters, says Morningstar analyst
It has been a miracle year - for a few U.S. technology stocks.
Investors who missed the year's unexpected rally may be wondering if there still is room in 2024 to dip their toes into "Magnificent Seven" stocks, given a backdrop where the Federal Reserve is expected to pivot to rate cuts and inflationary pressures ease further.
On the other hand, shares of Nvidia Corp, $(NVDA)$ the group's big beneficiary of artificial intelligence optimism, were up 242% on the year through Monday, while Apple $(AAPL)$ shares were over 50% higher, according to FactSet.
Alphabet $(GOOG)$, Microsoft $(MSFT)$, Amazon $(AMZN)$, Meta $(META)$ and Tesla $(TSLA)$ round out the "Mag Seven" stocks, a term popularized on Wall Street as a bruising 2022 tech wreck morphed into a blistering rally.
Year to date, the large-cap S&P 500 index SPX, in which Magnificent Seven stocks account for more than one-quarter of the index weighting, has advanced 23.5%, erasing all their 2022 declines.
The Nasdaq-100 index NDX also has advanced nearly 53% so far this year, according to FactSet data.
Yet, the outperformance of a few stocks in 2023 has sparked debate about whether big tech can prop up markets again in the year ahead. Some see signs of a sugar high driving tech stocks. Others worry that headwinds could trigger another round of painful losses.
Here's what else market strategists think investors should consider about big technology companies in the coming months.
Tech needs another 'goldilocks' year
"There's always a possibility that you could see that momentum continue into 2024," said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. But he also sees "a very narrow window" for that to happen, given the Magnificent Seven stocks need growth that's neither "too strong or too weak."
That means a "goldilocks scenario," in which the economy is growing and inflationary pressures are declining for technology stocks to remain the backbone of the stock market next year, Suzuki told MarketWatch.
If economic growth accelerates, the rally will expand outside of the Magnificent Seven to other companies able to secure earnings growth, which could lead to a classic rotation, or profit recovery, into cheaper, cyclical stocks, said Suzuki.
That's when investors would become "comparison shoppers," he said, which potentially could pose a threat to the dominance of the small group of tech companies.
There also is a chance of the fuel that drove economic activity in 2023 starting to run low in the coming months, with tighter financial conditions weighing on economic growth and corporate profits, bringing earnings risk back to technology companies, Suzuki said.
See: Fed will try to 'Keep calm and carry on' amidst talk of steep rate cuts and recession
Rally may broaden
Analysts pointed to signs of the stock-market rally's recent expansion beyond the top stocks of 2023, with investors turning to roughed-up corners of the market after a relentless "everything rally" in November.
Specifically, last Monday marked the second time since 2012 that the Nasdaq-100 managed a positive close when all Magnificent Seven names closed in the red, according to Dow Jones Market Data. The Russell 2000 index RUT in December also has been outperforming the S&P 500 by the widest margin since January 2021, according to Dow Jones Market Data. The small-cap index gained nearly 10% so far this month, compared with a 3.8% advance for the S&P 500 and 4.8% for the Nasdaq Composite COMP.
Related: Here's what hit the Magnificent 7 stocks, and why the selling may continue.
Tom Hulick, chief executive officer of Strategy Asset Managers, said there may be a pause in the Magnificent Seven acting as market leaders, but that he sees the rally broadening because AI is helping "laggards," and economic conditions becoming more favorable to some of the smaller companies.
Hulick and his team have recommended their clients hold all their positions in technology stocks. In particular, they think Nvidia will be the leader in the chip sector to fuel this new "technological advancement" using AI, he told MarketWatch.
His view is that the stock market in 2024 could look like a compressed coil, poised for "a bull market that will eclipse other bull markets that you've had in the past," which were driven by earnings expectations, but now hinge on a "futurist outlook."
Year Ahead: Investors kissed the era of cheap money goodbye. Now what?
'Magnificent Seven' could add more names
In place of the big and established mega cap technology players, some market strategists think there is opportunity in the "next rung of AI adopters," including those companies that can strengthen their products using AI.
Dave Sekera, chief U.S. market strategist at Morningstar Research Services, said one effective way to tap the AI theme, without paying huge valuation premiums, is to look at related players, companies embedding new technologies into their workflows and driving revenue growth, but not those actually making chips, such as Nvidia.
"A lot of companies will probably outsource their AI because they won't necessarily either have the financial wherewithal or the expertise to build out and test their own AI models," Sekera told MarketWatch. "So next year, people will look more for the second-derivative players who are going to have that tailwind behind their underlying fundamentals, because they will be able to participate in the growth and expansion of AI."
American companies are increasingly focused on AI spending, with spending intentions doubling to 62% from 31% last year, according to Piper Sandler's latest enterprise spending report.
"The breadth of enterprise interest in AI surprised us with 73% planning, testing, or implementing generative AI in 2024," said a team of Piper Sandler's research analysts led by Rob Owens. Their estimate was derived by polling nearly 100 chief information officers on spending plans for the next few years.
Drilling down in AI, graphics processing units (GPUs), sometimes called the "heart of AI" are expected to become an over $400 billion opportunity by the end of 2027. Analysts expect Nvidia to be the "clear leader" in the sector, with over 70% of the total market, while AMD $(AMD)$ and Intel $(INTC)$ will compete for the rest, analysts wrote in a note from last week.
With that backdrop, Suzuki of Richard Bernstein Advisors sees risks in betting on the AI craze lifting all tech boats.
"The natural perception is that investors have missed the big opportunity in the original group, so they need to go seek out the secondary beneficiaries," he said. "The problem is that all the companies end up being priced as winners, with huge growth and benefits from whatever the theme is, but they can't all be winners."
More from Year Ahead: The VIX says stocks are 'reliably in a bull market' heading into 2024. Here's how to read it.
-Isabel Wang
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 23, 2023 06:52 ET (11:52 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.