Slower M7 Revenue Growth Next Year
Expectations for Rotation Among Small and Medium AI Firms
Wall Street opinions are increasingly urging attention to companies that have missed out on this year's artificial intelligence (AI) theme-driven rally. Given that the stock prices of major U.S. big tech companies have surged sharply compared to their growth rates, making further gains difficult to expect, there is a forecast of rotation in the market. Additionally, the warming effect of a potential interest rate cut in September could lift the stock prices of small and mid-sized companies.
On the 17th (local time), U.S.-based investment bank Baird stated in a client memo, “Investors are beginning to turn their attention to stocks with solid fundamentals but low expectations, increasing the likelihood that these stocks will rise.”
They identified six companies with upside potential: application security firm F5, semiconductor measurement equipment company Keysight, semiconductor manufacturer Diodes, semiconductor-related laser company Coherent, optical component manufacturer Lumentum Holdings, and semiconductor test system manufacturer Ehr Test Systems.
Ted Mortenson, Baird’s technical desk strategist, emphasized, “The growth of AI-related large-cap stocks that have surged sharply will slow down going forward,” adding, “There is no doubt that previously overlooked stocks will catch up with their price gains.”
Bloomberg Intelligence predicted that the earnings growth of the Magnificent 7 (M7), referring to the seven major U.S. big tech companies, will slow next year. Bloomberg News reported, “AI winners like Nvidia and Microsoft (MS) are trading at significant premiums based on price-to-earnings ratios (PER),” and “from this perspective, the stock prices of AI laggards appear inexpensive.” Melius Research pointed to Intel, AMD, and IBM as AI laggards with potential for gains in the second half of the year.
Citigroup also recently suggested that investors realize profits from the sharply rising AI stocks and rebalance their portfolios toward a broader range of AI-related stocks.
The overwhelmingly heightened expectations for a Federal Reserve (Fed) interest rate cut in September further support the view that the upward trend centered on large AI-related stocks will shift toward small and mid-sized stocks.
On this day in the New York stock market, the Nasdaq index fell 2.77% from the previous trading day, marking the largest single-day drop since December 15, 2022 (-3.23%), due to shocks such as the U.S. considering additional semiconductor export restrictions against China.
Nonetheless, the decline in small and mid-sized stocks was relatively modest, attracting attention. It is analyzed that expectations for improved earnings from these companies due to the interest rate cut helped somewhat cushion the downward pressure. Small and mid-sized companies are particularly sensitive to interest rate changes because they rely heavily on bank borrowing.
Kwon Oh-sung, equity and quant strategist at Bank of America (BoA), stated, “When everyone holds growth tech stocks, the value aspect has been neglected.”
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