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Shifting Landscape Of Tech Stocks

In the past year, technology stocks have been favourites among a wide range of investors due to the strong growth in their share prices. 

Specifically, the respective stocks from Nvidia, Alphabet, Apple, Amazon, Meta, Microsoft and Tesla have been chosen as the preferred ones, winning the title of the “Magnificent Seven”, with Nvidia’s stock recording a year-to-date gain of 80% as of April 2, 2024. 

There is no doubt that with technology continuously growing with aspects such as the application of artificial intelligence (AI), the Magnificent Seven have become very successful. However, it is worth noting that this is not really the main reason why these mega-cap stocks have been rising significantly. Instead, it is believed that the real reason behind the success in top tech companies is rather due to the surging earnings momentum and strong profit growth witnessed throughout last year and the beginning of this year too. 

However, despite such success, many experts believe that there is the possibility for the trend to begin turning backwards due to expectations of slower performances in the coming quarters.In fact, two of the 7 stocks – specifically Meta and Tesla – have already shown that their pace of profitability has slowed down, as their earnings growth for the first quarter of this year fail to beat expectations. And although Alphabet and Microsoft reported higher-than-expected first quarter earnings, expectations are still leaning towards the possibility of witnessing slower performance in the coming quarters.

Also, adding to the not-so-optimistic expectations, UBS Global Research strategists downgraded 6 of the 7 magnificent stocks. Nvidia, Alphabet, Apple, Amazon, Meta, Microsoft all were downgraded from Overweight to Neutral, as strategists at UBS also believe that their respective future earnings growth will likely slow down rather than increase.

It has been highlighted that the downgrade had nothing to do with these companies being rich in value, or concerns about the future of their AI technologies. Instead, it is because, when compared to the pandemic period and the exceptional performance they had during that time, the current growth and earnings outlook for these companies may not be as robust. 

In addition, it is believed that the mega-cap tech stocks are experiencing cyclical pressures. Let’s highlight that these are part of a typical market cycle, as although there are periods of growth and peak, there are also possible stages in which stocks experience declines and lower points. Thus, as the future outlook for the Magnificent Seven right now does not appear as promising, it seems like the cycle is could be shifting towards a more bearish momentum.

Moreover, it is important to remark that the downgrade was only focused on the 6 major tech companies mentioned above, and not the technology sector as a whole. In fact, UBS highlighted that the downgrade did not affect all tech stocks, and maintained an Overweight rating on tech outside of the Magnificent Seven. 

UBS believes that not so famous tech companies may offer better growth prospects compared to the largest firms in the S&P 500, thus, for those keen on investing in tech stocks, they may need to revise their strategies and consider diversifying their portfolios with lesser-known companies.

Nonetheless, despite UBS’ perspective on the future projections of the Magnificent Seven, we still should acknowledge the substantial increase observed in Alphabet’s stock today. As mentioned previously, the tech giant reported positive quarterly earnings, with a year-over-year 15% increase. This, along with the authorization by the company’s board of a dividend of 20 cents per share to be distributed on June 17 to all shareholders of record as of June 10, boosted the stock value by 10%.

Such increase was not expected by many, including experts from UBS. Therefore, while there may still be uncertainty surrounding the future of the Magnificent Seven tech stocks, as highlighted in previous posts, it is important for investors to exercise caution and refrain from hasty decisions regarding the sale of their stocks, and to prudently consider implementing diversification strategies to mitigate losses against any potential downfalls.

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