Why parts of the ‘Magnificent 7’ are losing their luster

Published Sat, Feb 3 20249:15 AM EST

After turbocharging late 2023's stock market rally, some of the " Magnificent 7 " technology darlings are looking less magnificent this year. In 2023, Nvidia was the clear leader of the group of seven market drivers, soaring 239% alone. The maker of critically important artificial intelligence processors was followed in performance by Meta , Tesla and Amazon , which respectively rose 194%, 102% and 81%. Even the stocks that lagged inside the group of seven still beat the S & P 500 's 24% gain by at least twice as much last year. Shares of Microsoft , Alphabet and Apple — the three weakest-performing members of the group — added 57%, 58% and 48%, respectively. But investor expectations for a broadening market rally involving a greater number of stocks this year have been bolstered by the diverging performance of the Magnificent 7 so far in 2024. Of the seven names in the group, two are now trading lower in early 2024 — Apple and Tesla — one of them by a lot. Shares of Meta and Nvidia are leading the Magnificent 7 for the year, with both stocks jumping roughly 34% each. On the other hand, Tesla finished Friday's session 24.4% lower on the year, while Apple has fallen 3.5%. This pessimism regarding Tesla and Apple has extended beyond their year-to-date stock performance. Compared to the rest of the group, analysts are less bullish on the two names, with just 29% of analysts covering Tesla rating it a buy, while about 46% of analysts have given Apple the same rating. The rest of the Magnificent 7 stocks, however, have received anywhere from 70% to 85% buy rating consensus. Meanwhile, analysts are also expecting much slower earnings growth this year from the two laggards. While the other five are forecast to see at least double-digit earnings growth estimates, analysts predict Apple's earnings growth to stay relatively unchanged. On the other hand, consensus estimates call for Tesla earnings to fall by 20%. Brewing concerns According to Wall Street analysts, this downward trend for Apple and Tesla points to fractures beneath the surface at both companies. While last year's rally could be attributed to all tech-adjacent stocks receiving a blanket artificial intelligence-induced boost, investors are finally subjecting individual stocks to more scrutiny, said Art Hogan, chief market strategist at B. Riley Wealth Management. Hogan believes that Tesla and Apple may be suffering because they haven't yet determined how to make money from artificial intelligence. "It's hard to put your finger on how Tesla benefits necessarily from artificial intelligence, writ large, at least in the near term," he told CNBC. "Not surprisingly, Apple falls into that category as well, as they haven't really announced an AI strategy." Baird listed Tesla as a "bearish fresh pick" earlier in the week, citing a Delaware court ruling against CEO Elon Musk's pay package as a catalyst for the negative sentiment. Analyst Ben Kallo also noted that disruptions to Red Sea shipping routes could affect Tesla deliveries in 2024. Meanwhile, infrastructure-related headwinds within the electric vehicle space are also hurting Tesla stock, Hogan said. The strategist added that Tesla is also suffering from the lack of a low-end model to compete with BYD in China. Similarly, investors sent shares of Apple lower by 3.4% last week after the company reported a 13% sales decline in China , despite beating fiscal first-quarter expectations for both earnings and revenue. Earlier this month, Barclays analyst Tim Long downgraded Apple to underweight from equal weight, citing weaker demand and "lackluster" sales of the iPhone 15, especially in China. Likewise, Piper Sandler analyst Harsh Kumar blamed peak growth rates and valuation concerns as two reasons for downgrading Apple to neutral from overweight. Also playing into the bearish sentiment on Apple and Tesla is that technology stocks have simply been held to a higher standard, according to Charles Schwab investment strategist Kevin Gordon. "Tech is the only sector that's seen more positive revisions of all the sectors lately. The bar has been lowered for all other sectors but raised for tech," Gordon told CNBC. Blips on the radar On the other hand, Ed Yardeni, president and chief investment strategist at Yardeni Research, isn't particularly worried about the outlook for Apple or Tesla. He believes that any short-term fluctuations in sentiment won't ultimately matter in the long run. "I think it's unrealistic to expect that [the Magnificent 7 stocks] are all going to perform in the same fashion on a regular basis," he said to CNBC. "From time to time, they're going to diverge for a while." However, Yardeni pointed out that the seven technology titans all have strong cash flows, are less debt-dependent than other companies, are managed by innovative leaders and have the technological prowess to maintain high profit margins. "You never want to bet against these companies because they have a tremendous amount of experience creating growth," Yardeni added. "My sense is that they'll continue to account for at least a quarter of the market for the foreseeable future and have high valuations … The only real problem with the Magnificent 7 is they're expensive." Catchup trade As the market broadens out to include more stocks in 2024, Hogan sees investing opportunities for sectors that underperformed last year, such as financials, healthcare and energy, to catch up with the major market averages. Likewise, Gordon predicts that financial names could have a moment in the spotlight this year. "That's an area that has a lot of catch-up to do to the broader index but also stands to benefit if you have seen a peak in yields for the cycle," Gordon said. Similarly, falling interest rates — alongside a waning dollar — also make the case for a comeback from small-cap stocks in 2024, according to Hogan. "The gap between the Russell 2000 and the S & P 500 is the largest we've seen going all the way back to 2000," he said. "Mean reversion alone would dictate the credible possibility for small caps to start finally getting some sponsorship." — CNBC's Fred Imbert contributed to this report.