'Mag 7' becomes the 'Lag 7': Traders are wondering what's wrong with the tech market leaders

Published Thu, Jan 4 20247:05 AM EST

The Magnificent Seven's underperformance to start 2024 could be a small window into what investors can expect for the rest of the year, as the rally starts to broaden to the rest of the market. Mega-cap tech stocks suffered a sharp drop to kick off the new year. Apple this week is down by more than 4% following a Barclays downgrade , while shares of Nvidia are down nearly 4%. Meta Platforms and Amazon are off by more than 2%, each. Market observers expect the drop could be attributed to overextended valuations after the recent rally — a healthy pullback after the S & P 500 ended last year with nine straight weeks of gains, a streak the broader index last achieved in 2004. But some say that the drawdown is a portent of how markets will behave this year. Even if mega-cap tech stocks do not sell off meaningfully, these observers say, they will take a backseat to other parts of the market such as small- and mid-caps, or defensive sectors such as financials and health care. AAPL YTD mountain Apple, YTD "I think this is going to enter an environment of an 'HLTR,' which I defined technically as sort of a high level trading range, meaning that the overall equity market is going to sort of get stuck and end up going sideways, kind of near the old highs of 2021, 2022, basically about where we are," said Craig Johnson, chief market technician at Piper Sandler. "And as that plays out, the stocks like Apple, the stocks like Tesla, the stocks like Nvidia, Microsoft, you get it, the 'Mag Seven' companies just start to become the 'Lag Seven,'" Johnson added. "You just end up consolidating sideways." Johnson, who has a year-end target of 5,050 for the S & P 500, expects the broader index can rise just 6% from Tuesday's close of 4,742.83. He anticipates most of the gains will occur in the backend of 2024, after this year's presidential election. Fed to save the day? Other market observers agreed with that take. Carlos Asilis, chief investment officer at Glovista Investments, said this week's pullback was to be expected, adding that the easing of monetary policy from the Federal Reserve will be good for the broader market. "There's a sense that the average S & P constituent is trading cheap," Asilis said. "And if interest rates are coming down, and other major central banks will be cutting rates, equities should have a good year, especially the average stock." "I think it might be a portfolio rebalancing … away from these very crowded longs, right, in these Magnificent Seven into the average stock, the average S & P name," Asilis added. As for mega-cap tech stocks, Asilis expects how they will perform going forward will depend on their guidance in the upcoming corporate earnings season. To be sure, others advise investors against making a call so early on how markets will perform, as stocks broadly could see continued upside. Said Fairlead Strategies' Katie Stockton: "It's a pullback that we're seeing within the context of an uptrend." She added that investors could soon buy the dip in Apple. The catch-up trade For many investors, that means the opportunity lies elsewhere from the mega-cap tech stocks. Piper Sandler's Johnson said equities historically performed well after a final rate hike. However, he expects that small- and mid-caps will outperform after last year's weakness. He spies opportunities in both the S & P Mid Cap 400 (MID) and the Russell 1000 Growth (RLG), though each index is down roughly 2% this year. Market observers are also seeing opportunity in last year's market laggards such as financials and industrials or other parts of the market. Glovista's Asilis said these sectors could have a good year based simply on multiple expansion, even if they do not post robust top line growth. "There could be considerable upside," Glovista's Asilis noted, in other sectors. "If the economy slows down only moderately, just purely on multiple expansion, you could see considerable, you know, 20% to 30% in some of these sectors." — CNBC's Michael Bloom contributed to this report.