HIBL - How The Rise Of The Magnificent 7 Compares To Market Trends Of The Past

2023-12-20 06:19:00 ET

Summary

• Can the Magnificent 7 continue to rally into 2024?
• How the Magnificent 7's rise compares to the dot-com bubble.
• Why the rise in tech stocks highlights shortcomings for the markets.

The rise of the Magnificent 7 tech stocks has been a key driver of the S&P 500 this year. That’s led to comparisons being made to market trends of the past, including the dot-com bubble. Phil Davis, founder of philstockworld.com, discusses with MoneyTalk’s Kim Parlee.

Transcript

Kim Parlee: One of the big stories for equity markets this year has been the performance of the tech sector, specifically the so-called Magnificent 7. These stocks have been the main driving force of the S&P 500 this year. But can they continue into 2024?

Joining us to talk more about the current market outlook and what to expect going forward is one of our favorites, Phil Davis, founder of PhilStockWorld.com. Phil, always great to have you with us. Thanks so much for joining us.

Phil Davis: Hi, Kim. Thanks for having me.

Kim Parlee: Let's just first give a general outlook and get your thoughts on the Magnificent 7 and why you think it's both maybe a good thing and a bad thing for markets.

Phil Davis: Well, I mean, I think that you've got to look at the market as a whole. And you have to understand that there are these seven stocks, Apple ( AAPL ), Microsoft ( MSFT ), Amazon ( AMZN ), Google, Alphabet-- which, in fact, I'm sorry. Google gets counted twice because--

Kim Parlee: [LAUGHTER]

Phil Davis: -- it's [[GOOG]] and [[GOOGL]] in the indexes. It makes no sense. And people don't talk about this enough. They count it two times. There's NVIDIA ( NVDA ), and there's Meta ( META ), which used to be Facebook. And, of course, Tesla ( TSLA ), which is -- I don't know why they get lumped in with these stocks, but they do.

These stocks have so much outperformed. I believe they're up about 76% for the year. And the rest of the S&P is up 6%. So they are 90% of the S&P's gains for the year is just these seven stocks. It's not a good way to track things. That's the problem. It's a little bit -- you get a distorted view of the markets.

Kim Parlee: You really do. And, again, it just speaks to the concern about market concentration. And people have to think about that when they're investing. This isn't the first time, though, we've had dominant stocks in the market. I mean, you can think back about the Nifty 50. I think we used to talk about the Four Horsemen of the dot com era. How does this compare to that?

Phil Davis: Okay. Those are great callbacks. [LAUGHS] It's a little different because you've got -- well, it's not different to the Nifty 50, because the Nifty 50 was IBM, and all the big-- IBM ( IBM ), AT&T ( T ), and so on and so forth. Those guys really drove the earnings. There's nothing wrong with 50 stocks, 10% of the S&P 500, driving the index.

There's something wrong with seven stocks driving the index. That's the big difference there. The Horsemen, back in the dot com days, well, that was a lot of hype. These stocks are mostly delivering. Google, Microsoft, they're delivering some major numbers.

But what about everybody else? I mean, the rest of the economy -- and this is what you see with these polls that you see where you say, why are Americans so upset with the government? They're upset because the reality isn't what the numbers show. The market isn't reality.

The market -- people are having a very hard time. The economy's not that great. It's just sort of struggling along. But the stock market is having a huge party lifted by seven stocks.

Kim Parlee: Yeah, and the other 493 not so much, which is the issue. So what about looking ahead? When you think about the Magnificent 7 going forward or just the S&P 500 going forward, how should investors think about it?

Phil Davis: Well, there's a point they cross. And that's about 30 times earnings. When you're at 30 times earnings, it means you're effectively returning about 3% per year. So you get to that point when the markets -- when these stocks are returning 3% per year, but a bond is returning 4.5%, 5% a year. And you've got to say, well, I'll take the bond.

I mean, there's no point in this stock right now. We're hitting that point again. When you get to the NASDAQ, 1600 is a good indicator right now where we are, and 4600 on the S&P, you're at 30 times earnings. And, at that point, I think you've got to restrain yourself and try to find something else to invest in.

Now, fortunately, something else to invest in is the other 493 stocks. There's plenty of bargains in that, because nobody seems to care about those stocks. Nobody cares about the value stocks in the S&P right now.

Kim Parlee: So how are you looking at those then when you look ahead? I mean, what other -- what sectors or what specific areas are catching your attention?

Phil Davis: Well, sectors is interesting. I mean, we're looking at sectors that are kind of bulletproof because we still think there could be a recession, a tiny slip of the Fed, and we could be in trouble. So, we're looking at stocks that do well pretty much regardless.

And you'll see that when we talk about our trade-of-the-year picks is we're looking at things that are effectively bulletproof stocks. We want stocks that don't have a lot of debt because rates are going up.

We want stocks that have a very high earnings-to-employee ratio, so that when wages rise, it doesn't affect them too much. And, of course, we want stocks with a good P/E ratio so they're competitive with bonds.

Kim Parlee: And what about sectors though? I mean, or anything you're seeing. I understand the profile of the company. Do you like -- I know you've talked about renewables before. You like that. I think you like healthcare as well?

Phil Davis: Sure. Well, healthcare, you've got the demographic of the aging population, right? So people are aging into more and more healthcare. That's unstoppable essentially.

Renewables, you've got massive stimulus. You've got the onus of having to do something about global warming. That's not going away. It's nothing suddenly going to happen that's going to cause the planet not to need more renewables for the next decade or so. So those are really good megatrends to focus on.

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