Why it’s time to avoid the Magnificent Seven stocks, says equity strategist

Easing inflation and a few Federal Reserve rate cuts this year could help bolster laggards of the U.S. stock market, especially if the economy avoids a recession, says Craig Sterling, head of equity research, U.S., at Amundi’s investment institute.

The group of megacap technology stocks known as the “Magnificent Seven” gained 111% on average last year, while the rest of the companies in the S&P 500 index
SPX
advanced only about 3.5%, Sterling said during a company outlook on Wednesday.

The group, comprised of Apple Inc.
AAPL,
-0.54%,
Alphabet Inc.,
GOOG,
+0.58%

GOOGL,
+0.86%
Amazon.com Inc.,
AMZN,
+7.87%
Meta Platforms,
META,
+20.32%
Microsoft Corp,
MSFT,
+1.84%
Nvidia Corp.
NVDA,
+4.97%
and Tesla Inc.
TSLA,
-0.50%,
has continued to power higher in January, albeit with some fracturing seen within the group.

Sterling thinks owning “the rest” of the S&P 500 could prove strategic in 2024, given Amundi’s view that the Fed likely won’t cut rates by as much as many expect and that a “durable” earnings recovery probably doesn’t take hold until the second half of the year, which could spur a broader stock-market rally.

“We have yet to see the impact of interest rates on earnings,” Sterling said. “I would not want to be in a stock that’s trading 20x, or perhaps 30x [forward] earnings when this rolls over,” he said, referring to forward price-to-earnings ratios for the Magnificent Seven stocks, versus the roughly 16x ratio for the rest of the S&P 500.

Sterling also warned that excess liquidity continues to drain from the financial system, as the Fed plans to let its emergency bank-lending program expire. It was rolled out nearly a year ago after the collapse of Silicon Valley Bank to help stave off a broader banking crisis.

On the flip side, recent stability in the roughly $26 trillion Treasury market makes longer-duration bonds look attractive, said Paresh Upadhyaya, director of fixed-income and currency strategies at Amundi.

While the benchmark 10-year Treasury yield
BX:TMUBMUSD10Y
touched 5% in October, a 16-year high, it fell back to 4% in December and has been more stable in recent weeks, around 4.2%.

“That seems like it should be in everyone’s portfolio,” Upadhyaya said. “It’s a no-brainer.”

The S&P 500 ended at a fresh record on Wednesday, while the Dow Jones Industrial Average
DJIA
posted a modest 0.3% retreat and the Nasdaq Composite Index
COMP
gained 0.4%.

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