Given that most of the “Magnificent Seven” has surpassed consensus expectations, Goldman Sachs said the group of big technology companies could once again exceed the broader market’s gains this year. “As the Dot Com boom showed, continued outperformance requires stocks to exceed the high bar set by consensus. Although growth expectations are high, if estimates are realized and valuation remains unchanged, the group will outperform,” David Kostin, the firm’s chief U.S. equity strategist, wrote in a Friday note. According to Kostin, if the Magnificent Seven beats consensus estimates, the group’s “superior sales growth” will lead the tech giants to outperform the remaining 493 names in the S & P 500 this year. So far, six of the Magnificent Seven — all but blockbuster chipmaker Nvidia — have reported fourth-quarter results. Each of the companies, with the exception of electric vehicle maker Tesla , exceeded consensus sales forecasts, and collectively posted 14% year-over-year quarterly sales growth, Kostin noted. If the group’s 30x price to earnings multiple and consensus estimates for 2025 remain the same, Kostin expects the group could gain 16% through the end of this year. But if earnings next year follow their “typical path of negative revisions” experienced over the past decade, the group would return just 9%, he said. Still, he said, that exceeds Goldman’s forecast of a 4% return for the broader market this year and 1% implied return for the stocks excluding the Magnificent Seven, given the firm’s 5,100 target for the S & P 500. “While elevated hedge fund positioning, numerous antitrust lawsuits from the DoJ and the FTC, and shifts in the macro regime will influence returns for the stocks, we believe that sales growth for the seven stocks will be the most important driver of the group,” Kostin wrote in the note. Consensus expectations call for the seven tech companies to grow sales at a 12% compound annual growth rate through 2026, compared with a 3% CAGR forecast for the remaining companies in the broader index, Kostin said. Analysts also expect the Magnificent Seven to outperform in margin expansion over the next three years, compared with the rest of the market, he added. Although investors commonly question the sustainability of the Magnificent Seven’s rapid growth, as well as the stocks’ high valuation, Goldman cited the group’s “fast expected growth and high quality attributes” that justify their premium valuation. “One significant difference between the Magnificent 7 and the Tech Bubble 5 is their penchant to re-invest for growth,” Kostin said. “The Mag 7 re-invests 60% of their cash flow from operations through growth capex and R & D. This reinvestment rate is more than double the 26% of the Tech Bubble 5 and about 3x that of the S & P 493.” The analyst acknowledged the differences in consensus growth expectations across the group, however, as Nvidia is expected to grow sales at a 31% annual pace over the next three years, while Apple ‘s growth is predicted to be 6%. Tesla’s consensus sales forecast has also dropped significantly in recent months, while Nvidia’s has soared. Sales growth has driven the bulk of Magnificent Seven returns since 2019, Kostin noted. In addition to the stocks already mentioned, the group includes Alphabet , Facebook parent Meta , Amazon and Microsoft . Shares of the Magnificent Seven raced ahead of the broader market last year. Now, the stocks comprise 29% of the S & P 500 index and 22% of consensus net income figures for this year, according to the firm.
Goldman believes it’s likely the ‘Magnificent 7’ beats the market again this year
Feb 5, 2024
