The success of high-tech stocks, particularly those dubbed the “Magnificent Seven,” have analysts and investors straddling the fence between fear and greed. They’re caught between the fear of missing out (FOMO) and climbing a wall of worry. And it’s no wonder, for the past several years, driven by innovation, growth, and an ever-expanding digital economy, these stocks have relentlessly rewarded investors with significant growth. Although there is no sign of slowing growth for these companies, the pace and the new height from which to fall is contributing to nervousness, which paradoxically could slow the pace.
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Have valuations gotten a little ahead of themselves as investors have plowed money into the Magnificent Seven stocks? There are analysts who are positive about the group and others around them who believe that the current heights may be the only thing that may hold them back.
A History of Outperformance
To understand the current dilemma, it’s helpful to look back at the recent history of high-tech stocks. Companies like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Alphabet (NASDAQ:GOOGL) have consistently delivered impressive earnings, inspiring investors to drive their stock prices to unprecedented levels. A market capitalization of a trillion dollars was unheard of a half-dozen years ago. Apple smashed that barrier in late 2018 and is now worth over $2.5 trillion. This makes it the most valuable company in the world, with others not far behind.
As for the Mag Seven, their collective relative strength (RS) is near 80. An RS above 70 typically signals things are about as good as they can get. An average reading is 50, and a stock with a high RS is generally thought of as “overbought.”
Sky-High Expectations
As a result of their past success, these companies now face sky-high expectations from investors and analysts alike. For instance, Meta Platforms (NASDAQ:META), the tech company formerly known as Facebook, has been under pressure to maintain its growth trajectory despite regulatory challenges and changing user preferences. The market’s anticipation of continuous outperformance creates immense pressure to innovate and expand at a pace that may one day prove unsustainable.
But that “one day” may not be soon. Wedbush analyst Dan Ives has said the AI revolution is in its “1995 moment.” This means that AI is the start of another internet era for stocks. Gains don’t signal the end of a dot-com-type bubble.
Market Saturation Concerns
Furthermore, the saturation of high-tech markets is another critical factor. With major segments like smartphones, personal computers, and social media reaching maturity, finding new avenues for growth becomes increasingly challenging. For example, Amazon (NASDAQ:AMZN) has dominated e-commerce and cloud computing, but its expansion into new markets such as healthcare, grocery, and autonomous vehicles involves increasing risk and uncertainty.
Valuation Pressures
High valuations are also a concern. Companies like Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA) have seen their stock prices surge, driven by enthusiasm for artificial intelligence and electric vehicles, respectively. However, these high valuations imply that any slowdown in growth could lead to significant stock price corrections. Analysts are cautious, as even minor disappointments in earnings or growth projections can lead to substantial market reactions.
“No one is overweight them, because they are too big,” wrote Evercore ISI technical analyst Rich Ross.
The Innovator’s Dilemma
Moreover, the concept of the “innovator’s dilemma” comes into play. As large tech companies become more established, they may struggle to innovate at the same pace as nimble startups. This dilemma can be seen in the case of (the slightly less than magnificent) Intel (NASDAQ:INTC), which has faced challenges in maintaining its dominance in the semiconductor industry amid stiff competition from companies like AMD (NASDAQ:AMD) and other newer entrants.
Balancing Act for Investors
These combined concerns create a delicate balancing act for investors. While high-tech stocks remain attractive because of their potential to deliver significant returns, the risks associated with their past success cannot be ignored. Diversification and careful analysis of each company’s growth prospects and market position are crucial. Investors need to assess whether these companies can continue to innovate and find new growth opportunities or if they will struggle under the weight of their own success.
Key Takeaway – Success Is Now a Double-Edged Sword
The remarkable success of high-tech stocks in the past is now a double-edged sword. While these companies have proven their ability to innovate and grow, they now face the challenge of living up to sky-high expectations and navigating saturated markets. Investors must remain vigilant, balancing optimism with a realistic assessment of the risks. The future of high-tech stocks will depend on their ability to continue evolving and finding new pathways to growth, ensuring that their past success does not become a stumbling block for future performance.
