Mag Seven: A Pullback Opportunity You Shouldn't Miss (Technical Analysis)

We previously discussed the Magnificent Seven (Mag Seven) stocks in late July, highlighting their strong earnings growth and attractive valuations. However, recent market conditions have led to a pullback in their performance. In this article, we will analyze the current situation and argue that this pullback presents an excellent opportunity for investors to add exposure to these stocks.

Market Pullback Led by Mag Seven Decline
The U.S. stock market experienced a significant pullback on Friday, with the S&P 500 falling 3%. This decline was led by the Magnificent Seven stocks, which have shed nearly $3 trillion in market capitalization since early July. The Mag Seven, which includes companies like Nvidia, Microsoft, Alphabet, and Amazon, have been under pressure due to concerns about surging artificial intelligence spending, recession fears, and the unwinding of the yen carry trade.



As seen above, the Mag Seven stocks have been in a corrective phase since early July, with most of the group trading below their 50-day moving averages. This pullback has presented an attractive entry point for investors looking to add exposure to these high-growth stocks.

Earnings Growth and AI Spending Concerns
The Mag Seven is expected to report aggregate second-quarter earnings growth of 30%, three times faster than the S&P 500 (10%). However, concerns about the sustainability of this growth and the cost of artificial intelligence (AI) investments have weighed on the group's stocks. Earnings reports from Tesla and Alphabet raised concerns about slowing earnings growth at America's tech titans, leading to a broad selloff of the Mag Seven stocks.



Despite these concerns, the Mag Seven's current valuation is, assuming earnings growth expectations hold up, historically attractive. The group's forward PEG ratio (a measure that takes into account earnings growth) is 0.8x, compared to a trailing PEG ratio of 1.3x. This suggests that the Mag Seven stocks may be undervalued at current levels.

Recession Fears and Rate Cut Expectations
Fears of a U.S. recession and expectations of interest rate cuts by the Federal Reserve have sparked a rotation out of cash-rich mega caps into smaller caps, which stand to benefit more from potential rate cuts. This rotation has contributed to the decline in the Mag Seven stocks, as investors moved their money into smaller companies that were expected to benefit more from potential interest rate cuts.

While recession fears and rate cut expectations have been a factor in the Mag Seven's recent performance, it is essential to note that these factors have been more pronounced or have taken on new significance compared to historical trends. The unwinding of the yen carry trade is a relatively new factor that has contributed to the group's recent performance.

Unwinding of the Yen Carry Trade
The unwinding of the yen carry trade, a popular investment strategy in recent years, sparked a broad selloff that sank Mag Seven stocks even further into correction territory on Monday. This factor, along with concerns about surging artificial intelligence spending and recession fears, has contributed to the Mag Seven's recent decline.

Despite these headwinds, the Mag Seven's strong earnings growth and attractive valuations suggest that the recent pullback may be an opportunity for investors to add exposure to these high-growth stocks. As the market digests the recent selloff and recession fears subside, the Mag Seven could resume their uptrend.

Is Mag Seven A Buy, Sell, Or Hold?
We reiterate our Buy rating on the Mag Seven stocks. We deduce that the deep pullback from their early July highs has presented investors with another excellent opportunity to add more exposure aggressively. Furthermore, we presented several potential upside surprises that could lift buying sentiments further in the Mag Seven moving ahead. Also, the Mag Seven's price action suggests that they could be forming a bottoming process, supported by oversold momentum indicators.



In conclusion, the recent pullback in the Mag Seven stocks presents an attractive entry point for investors looking to add exposure to these high-growth companies. Despite concerns about AI spending, recession fears, and the unwinding of the yen carry trade, the Mag Seven's strong earnings growth and attractive valuations suggest that the recent decline may be an opportunity to buy the dip. As the market digests the recent selloff and recession fears subside, the Mag Seven could resume their uptrend, providing significant upside potential for investors who capitalize on this pullback.