Despite recent downturns, the outlook for megacap stocks remains largely unchanged, according to market analysts. Several red flags have emerged for these giants, with the technology sector reaching its highest price-to-earnings ratio in over two decades. The “Magnificent 7” stocks, including Nvidia and Apple, continue to be considered the most crowded trade for the 16th consecutive month, as per a BofA Global Research survey of fund managers.
The early August market decline hit large tech and growth stocks particularly hard. Since the Nasdaq 100 peaked in July, Nvidia has fallen nearly 27%, Amazon has dropped 18.5%, and Alphabet has decreased by about 17%.
In response, global hedge funds initiated their largest one-day buying spree in five months, during a sell-off that saw the S&P 500 plummet by as much as 4.25%, according to Goldman Sachs. This buying was primarily focused on the tech sector, particularly semiconductors.
Despite these setbacks, the Nasdaq 100 is still up 6% for the year, while the S&P 500 has gained 9%. Strong financial performances in the tech and communication services sectors have bolstered investor confidence. These sectors are on track to report second-quarter earnings increases of 19% and 28%, respectively, from the previous year.
“There’s stocks that we like, we think the earnings are going to hold up and valuations have improved,” said Chuck Carlson, CEO of Horizon Investment Services. His firm is considering buying more shares of chipmakers Broadcom and Qualcomm following the recent pullback.
Some megacap stocks are now trading below their historical price-to-earnings averages, while others remain elevated. For example, Meta Platforms is trading at 21.7 times earnings, below its 10-year average of 25, whereas Microsoft is at 30 times, above its 10-year average of 25.
Economic concerns have contributed to the recent sell-off, but Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, believes that megacap tech stocks could attract investors if these worries persist. He describes these companies as the “new, defensive safe havens” due to their robust balance sheets and ability to grow earnings in challenging economic conditions.
While markets have stabilized over the past two sessions, it is uncertain if the recent volatility has ended. The economic landscape will be further tested with upcoming U.S. jobless claims data and the consumer price index inflation report.
Michael Landsberg, chief investment officer of Landsberg Bennett Private Wealth Management, advises caution. “We encourage investors to use rallies in the market to sell part of their holdings in the tech and industrial sectors to raise cash and prepare for bumpy roads and better possible entry points,” he said.
