Amid the ongoing 'sorting out' among the Magnificent 7 (M7) ? the seven major U.S. tech stocks ? this year, a forecast has emerged that the Fab 4 (F4), excluding Apple, Alphabet, and Tesla, will become the key players in the stock market. This comes amid observations that the M7, which surged last year on expectations of AI commercialization, will see sharply divergent stock price trends depending on future outlooks and earnings.
On the 31st of last month (local time), The Wall Street Journal (WSJ) reported that the M7, which led the U.S. stock market rally last year, is being replaced by the F4 this year. Named after the British four-member band The Beatles, the F4 in the stock market consists only of Nvidia, Meta Platforms, Microsoft, and Amazon from the M7. While the S&P 500 index surged about 11% since the first trading day of this year, setting a record high 22 times, the F4 outperformed with even higher double-digit gains. In contrast, Apple (-8%), Tesla (-29%), and Alphabet (9%) lagged behind.
The analysis that the gap between the two groups will widen in the second half of the year is the background for the emergence of the F4. The F4 is expected to increase profitability riding the AI tailwind, whereas Apple, Tesla, and Alphabet are facing growth constraints.
Apple is experiencing a slowdown in iPhone sales due to China's 'patriotic consumption' trend. Additionally, it is facing regulatory pressures from U.S. and European authorities, including antitrust laws and the Digital Markets Act (DMA), respectively, signaling potential cracks in its core growth driver, the 'Apple ecosystem.' Tesla is confronted with challenges from low-priced competition by Chinese rivals. Alphabet has suffered a blow to its credibility due to image generation errors in its Gemini AI, compounding difficulties amid the emergence of competing AI search engines like ChatGPT.
Notably, WSJ highlighted that the S&P 500 index continues its rally without a rebound from Apple and Tesla, diagnosing this as "an optimistic signal for the future stock market outlook."
Until now, the profitability of companies outside the M7 has been poor due to the impact of high interest rates. According to Gateway Investment Advisors, the earnings growth rate of the 493 companies in the S&P 500 excluding the M7 was -2.5%, indicating a contraction. However, from the second quarter, these companies' earnings growth rates began to rebound and are predicted to reach 18.1% in the fourth quarter, surpassing the M7's earnings growth rate of 15.5%. This reflects expectations that earnings could improve due to reduced borrowing costs following interest rate cuts.
Joseph Ferrara, an investment strategist at Gateway Investment Advisors, forecasted, "As we move into the second half of the year, the rally centered on large tech stocks could expand to other sectors."
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