The Magnificent 7 tech stocks just drove a $2 trillion rally over a few weeks that staved off a Nasdaq correction

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Investors were given plenty of opportunities to fret about the outlook for technology giants this earnings season. Instead, they doubled down on a strategy that has worked all year: piling into the biggest stocks.

That buying spree has fueled an abrupt U-turn in the Nasdaq 100 Stock Index that went from correction territory to a 15-month high in a matter of three weeks, adding roughly $2 trillion in market value along the way. 

With optimism running high that a recession will be avoided, market professionals are looking to tech behemoths like Microsoft Corp. and Apple Inc. to lead the market higher in the final six weeks of the year despite stretched valuations.

“There continues to be a divergence between the magnificent 7 and the rest of the market,” said Jason Benowitz, senior portfolio manager at CI Roosevelt. “There’s definitely a question as to whether or not there will be a catch up and how it would occur. As to what the trigger for that might be, I’m not concerned about that happening in the near term.”

Investors have piled in despite disappointing outlooks from the likes of Apple and Meta Platforms Inc. that marred bigger-than-anticipated third quarter profits from some Big Tech firms — raising concerns about whether such performance can be repeated.  

Investors like Benowitz have been heartened by signs the Federal Reserve might be done raising interest rates, as well as evidence that demand for artificial intelligence services is beginning to boost financial performance for companies beyond Nvidia Corp. 

Microsoft’s cloud-computing business, for example, saw a revenue lift in the quarter from customers using products from ChatGPT-owner OpenAI. That’s helped pushed the software giant’s stock to a record and within striking distance of a $3 trillion market value.

Rising profit estimates for Big Tech have helped to temper stock valuations but they still remain lofty. The Nasdaq 100 is priced at 24 times projected profits, down from a 2023 high of 27 times in July, according to data compiled by Bloomberg. Microsoft and Amazon are both priced at more than 30 times profits and Apple is trading at 28.

Still, there are questions as to how sustainable the latest rally is. The Nasdaq 100 is flashing a technical warning sign, with its relative strength index nearing the overbought level — indicating a risk of correction in the near future. The index was edging lower, on pace to snap its three consecutive sessions of gains.

Focus now turns to Nvidia, whose quarterly earnings are due on Tuesday after markets close. Wall Street is anticipating a third-consecutive blow-out report thanks to strong demand for its chips used in AI computing. But there’s also a risk of disappointment given elevated expectations, with the stock closing at a record on Tuesday. 

Investors will be looking to see how tightening US restrictions on chip exports affect Nvidia’s outlook, at a time when the escalating battle between the US and China prompted a sharp reversal of corporate strategy at Alibaba Group Holding Ltd. 

“The bar is very high,” Susquehanna analyst Christopher Rolland wrote in a research note on Thursday. “We expect nothing short of another strong quarter for Nvidia, but think investors are already expecting this.”

Still, Big Tech’s earnings growth is promising enough to quell investors’ doubts about valuations, said Anastasia Amoroso, chief investment strategist at iCapital. She singled out Nvidia, whose 200%-plus surge this year makes it the runaway top performer on the Nasdaq 100.

“Maybe 40 times forward earnings on Nvidia — maybe that seems expensive,” she said. “But when you expand the chart, it is actually not off the chart, so to speak. Everything is relative.”

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