• “From Magnificent 7 to Super Five”
• “Inflation’s Threat to the Tech Rally”

Last year, a select group of firms, often called the “Magnificent Seven,” dominated the overall return of the U.S. stock market. This elite circle, comprising Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, contributed 62% of the S&P 500’s returns, dividends included. ^[1]

Transitioning into the current year, the trend has slightly shifted. Only four companies—Nvidia, Meta, Microsoft, and Amazon—were responsible for over half of the S&P 500’s total returns, making up 55% of the index’s performance.

Source: Tradingview

Nvidia has led the tech wave with a nearly 80%^[2] surge this year.

Tesla and Apple have experienced a decline in their stock market performance, losing their luster over the first three and a half months of the year.

They’ve been unable to maintain momentum as their growth stories did not deliver and hence failed to justify their stock prices.

Apple’s shares have faced challenges, primarily due to reduced demand for its products in China and the company’s slow advancements in artificial intelligence (AI) space.

On the other hand, Tesla’s value has decreased by more than 30% year-to-date as enthusiasm for electric vehicles (EVs) wanes.

Does the rally have legs?

The surge in the tech sector, particularly among the companies dubbed the “Magnificent Seven,” is largely attributed to the remarkable earnings fueled by the rapid advancement in artificial intelligence (AI) technology.

In the last quarter of 2023, the earnings growth for U.S. stocks significantly surpassed what analysts had predicted, more than doubling their expectations.

The swift ascent of AI-related stocks is matched by rising earnings forecasts and, more importantly, actual earnings.

Companies at the forefront of AI, such as Nvidia and Microsoft, are effectively meeting the high expectations set for them.

Source: Koyfin

Nvidia’s earnings per share expansion has surged to triple-digit percentages^[3] thanks to its exclusive dedication to artificial intelligence (AI).

On the opposite spectrum, Tesla is notably divergent, marking the least favorable performance.

It is distinguished as the sole company anticipated to witness a decline in earnings in the next twelve months, yet it significantly leads in valuation compared to its counterparts.

Inflation could threaten the rally

Persistently high inflation might postpone cuts in interest rates that would otherwise favor growth, posing a risk to the strong earnings driving the market’s relentless surge.

Historically, market rallies concentrated among a few stocks often preceded significant downturns, as these leading companies fail to sustain earnings growth that validates their high valuations and the dense concentration of investor interest.

For instance, a scenario where 10 companies contributed to over two-thirds of the S&P 500’s increase marked an extreme narrowness in market breadth, mirroring situations observed in 1999, 2007, 2020 and 2021^[4].

In three out of these four instances, the market experienced a decline exceeding 10% in the subsequent year.

Investors can long any of the Magnificent 7 constituents using our 3x Alphabet, 3x Facebook,  3x Apple, 3x Microsoft,  3x Amazon,  3x NVIDIA, 3x Tesla.

Alternatively, traders can short any of the Magnificent 7 constituents using our -3x Alphabet, -3x Facebook, -3x Apple,  -3x Microsoft, -3x Amazon, -3x NVIDIA,  -3x Tesla.

1. S&P Dow Jones Indexes
2. Tradingview
3. Koyfin
4. Bloomberg