UBS Investment Bank’s chief US equity strategist, Jonathan Golub, has delivered a sobering assessment of the tech behemoths that have dominated the stock market rally over the past year. In a recent research note, Golub downgraded six of the so-called “Magnificent Seven” stocks—Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Nvidia (NVDA)—from overweight to neutral.
The move comes after a turbulent week for these tech giants, which included their largest weekly market cap loss in history. All seven stocks have retreated from their recent highs, with Nvidia experiencing a particularly sharp 10% single-day drawdown, its worst performance since March 2020.
Concerns about extended valuations or doubts about the capabilities of artificial intelligence (AI) do not drive Golub’s downgrade. Instead, it reflects the challenging comparisons and cyclical pressures facing these stocks, which do not necessarily apply to other technology companies or the broader market.
Despite Golub’s downgrade of the “Big 6,” he maintains an Overweight rating on the technology sector outside of these stocks. However, he suggests that the landscape may be shifting, with other areas poised to outperform the largest S&P 500 stocks.
Historically, earnings growth at large tech firms has been a significant driver of S&P 500 profits. FactSet predicts a remarkable 64% earnings growth from Amazon, Alphabet, Meta, Microsoft, and Nvidia in the first quarter, with the remaining 495 companies in the index expected to report a 6% decline.
However, we expect this dynamic to change over the course of the year. Consensus estimates indicate that while the tech giants’ earnings growth will slow to nearly 20% year-over-year by the fourth quarter, the other S&P 500 companies are anticipated to see a substantial uptick in growth, reaching around 17%.
Golub attributes the previous surge in mega-cap stocks not solely to speculative fervour or AI, but rather to surging earnings momentum. Unfortunately, this momentum is now waning, signalling potential challenges ahead for these tech giants.
The impending quarterly results from Tesla, Meta, Microsoft, and Alphabet will shed further light on the trajectory of these companies.
Despite the potential for near-term disruption, Golub remains optimistic about the broader market outlook, citing signs of faster-than-expected economic growth. He believes that a broadening out in earnings performance over the next year will support his call for the S&P 500 to reach 5,400 by year-end, buoyed by positive fundamentals and a robust economy.
As investors grapple with shifting dynamics in the tech sector and broader market trends, Golub’s assessment underscores the need for vigilance and adaptability in navigating the evolving landscape of equities.
