Will the "Magnificent Seven" Continue to Power the Market, or Will Their Shine Fade?
The coming week could be a pivotal one for the stock market, as investors try to determine if the dominance of the "Magnificent Seven" tech giants will continue or if the market is due for a correction. This past week saw significant volatility, with the tech-heavy S&P 500 and Nasdaq Composite ending the week in the red, while the Dow Jones Industrial Average closed higher. The small-cap Russell 2000 emerged as a top performer, suggesting a possible shift in investor sentiment away from megacap stocks. These moves were fueled by underwhelming earnings from Alphabet and Tesla, which triggered a selloff in tech stocks and a preference for more cyclical assets.
Key Takeaways:
- Earnings season is in full swing, with the "Magnificent Seven" tech giants set to report their results in the coming week. This will offer crucial insights into the health of the tech sector and its impact on the broader market.
- Investors are questioning the sustainability of the AI-driven growth of the "Magnificent Seven." The recent pullback has sparked worries that the AI hype may be waning, pushing investors to seek returns elsewhere.
- The Federal Reserve’s interest rate decision and the July jobs report will also be key factors influencing market sentiment. While the Fed is expected to maintain rates, investors will be looking for clues about the future interest rate trajectory and its impact on economic growth.
The Earnings Spotlight: "Magnificent Seven" Under Scrutiny
The "Magnificent Seven" – Apple, Microsoft, Amazon, Alphabet, Tesla, Nvidia, and Meta Platforms – have been major drivers of market growth in recent years, but their recent performance has raised concerns. Investors are anxiously awaiting their earnings reports, hoping to gain clarity on whether their growth can continue or if they’ve reached a plateau.
Microsoft, Meta Platforms, Apple, and Amazon are scheduled to report earnings this week, followed by Nvidia in late August. Disappointing results could signal a further decline for the broader market, particularly as investors are already worried about the AI trade potentially running ahead of itself.
Uncertainty Looms: A Correction or Something Bigger?
Strategas Securities’ Ryan Grabinski highlights the growing unease among investors, stating that "the number one question being asked by clients is: is this a correction or the start of something bigger." While he initially believed it was a "normal correction," he acknowledges emerging signs of concern.
Grabinski points to downward revisions in earnings estimates for the second half of 2024, particularly for the third and fourth quarters. He also notes "waning AI enthusiasm," raising doubts about the future return on investment for these companies.
Divergent Opinions on the "Magnificent Seven"
Even amidst the selling pressure, some investors remain optimistic about the long-term prospects of the "Magnificent Seven." John Belton, portfolio manager at Gabelli Fund, emphasizes the need to evaluate each company individually, noting that Tesla’s poor earnings were due to fundamental challenges, while Alphabet was simply caught in a market rotation.
He believes "bad fundamentals in this market environment are going to get really punished," while companies with "good fundamentals" need to surpass even higher expectations. While this dynamic may be temporary, it highlights the evolving investment landscape and the increasing scrutiny these tech behemoths are facing.
Belton acknowledges the short-term challenges but remains positive about the long-term prospects of AI. He emphasizes that the fundamentals of many of these companies "are still really good," and as long as earnings growth remains healthy and revisions continue in a positive direction, their valuations remain justified.
Beyond the Tech Giants: A Shift in Focus?
As the focus shifts from tech stocks, investors are seeking opportunities elsewhere. Belton identifies healthcare, industrials, and financials as promising sectors. However, this does not necessarily signal a complete abandonment of the tech sector, but rather a broader diversification strategy as investors navigate uncertainty and seek growth opportunities in a more dynamic market.
The Federal Reserve and the Job Market: Additional Uncertainties
This week will also see the Federal Reserve’s interest rate decision and the release of the July jobs report. While the Fed is expected to maintain rates at their current level of 5.25% to 5.50%, investors will be looking for guidance on the future path of interest rates and their potential impact on economic growth.
The job market has garnered significant attention as investors search for signs of a cooling labor market that could justify rate cuts, yet not so much weakening as to signal a recession. Economists are predicting a modest increase in jobs in July, but the focus will be on the overall trajectory of the labor market and its correlation with monetary policy.
Upcoming Economic Releases: A Week of Key Data
The coming week is packed with important economic data releases that will provide further insights into the health of the U.S. economy, ranging from consumer confidence and manufacturing activity to pending home sales and job market reports. These data points will provide further clues about the direction of the economy and potentially influence investor sentiment and the path of the stock market.
Here’s a look at some of the key economic releases to look out for next week:
Monday, July 29:
- 10:30 a.m. ET: Dallas Fed Index (July)
Tuesday, July 30:
- 9:00 a.m. ET: FHFA Home Price Index (May)
- 9:00 a.m. ET: S&P/Case-Shiller Home Price Indices (May)
- 10:00 a.m. ET: Consumer Confidence (July)
- 10:00 a.m. ET: JOLTS Job Openings (June)
Wednesday, July 31:
- 8:15 a.m. ET: ADP Employment Survey (July)
- 8:30 a.m. ET: Employment Cost Index (ECI) Civilian Workers (Q2)
- 9:45 a.m. ET: Chicago PMI (July)
- 10:00 a.m. ET: Pending Home Sales Index (June)
- 2:00 p.m. ET: FOMC Meeting
- 2:00 p.m. ET: Fed Funds Target Upper Bound
Thursday, August 1:
- 8:30 a.m. ET: Continuing Jobless Claims (07/20)
- 8:30 a.m. ET: Initial Claims (07/27)
- 8:30 a.m. ET: Unit Labor Costs preliminary (Q2)
- 8:30 a.m. ET: Productivity SAAR preliminary (Q2)
- 9:45 a.m. ET: Markit PMI Manufacturing (July)
- 10:00 a.m. ET: Construction Spending (June)
- 10:00 a.m. ET: ISM Manufacturing (July)
Friday, August 2:
- 8:30 a.m. ET: Jobs Report (July)
- 10:00 a.m. ET: Durable Orders (June)
- 10:00 a.m. ET: Factory Orders (June)
The upcoming week presents a crucial moment for the stock market as investors seek to decipher the future of the "Magnificent Seven" and navigate the complexities of the evolving economic landscape. The earnings reports, the Fed’s decision, and a plethora of economic data will provide valuable insights into the market’s direction, setting the stage for potential volatility and shaping investment strategies for the months ahead.
