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Stunning Rally in Big Tech Drives Nasdaq to 20,000

AInvestWednesday, Dec 11, 2024 4:27 pm ET
5min read


The Nasdaq Composite Index has surged to an all-time high of 20,000, driven by a stunning rally in Big Tech stocks. The Magnificent 7 stocks – Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla – have accounted for nearly 30% of the S&P 500 market cap and contributed over half of its 32% rally since the start of 2023. The gains in these stocks have been remarkable, with Nvidia's share prices more than quadrupling, Amazon's doubling, and Microsoft's and Alphabet's up over 70% and 60%, respectively. The latest earnings reports from these companies show three key dynamics driving their rally: earnings growth is picking up steam, valuations remain reasonable, and the potential of artificial intelligence is accelerating.

Earnings growth is accelerating for the Magnificent 7 companies. The earnings story for these companies starts with cost control measures put into place after the pandemic-era tech binge turned into a hangover in 2022 and part of 2023. Amid a slowdown in demand across business functions, the hyperscalers (Microsoft, Amazon, and Google) tightened their belts on costs and reduced headcount to protect profit margins. Then ChatGPT burst onto the scene. Not only did the platform bring artificial intelligence into the limelight, it also increased real demand for artificial intelligence implementation and related services. This increased demand, coupled with leaner cost structures, has offered a boost to earnings estimates for the year ahead.

Valuations remain reasonable for the Magnificent 7 companies. Despite the recent rally, the megacap stocks have shown no sign of slowing this year. Valuations have expanded modestly, but a larger proportion of the increase can be attributed to rising expectations for earnings in the year ahead. At face value, there is no denying that the megacap stocks trade at a premium to the rest of the S&P 500. But when comparing the aggregate forward price-to-earnings ratio to history, it becomes clear that the megacap stocks are not overvalued. In fact, they are trading in line with the 10-year trailing average.

The potential of artificial intelligence is accelerating for the Magnificent 7 companies. The latest earnings reports from the Magnificent 7 companies show that the potential of artificial intelligence is accelerating. Microsoft's Azure, Amazon's Web Services, and Google's Cloud Products all beat growth expectations in the fourth quarter, and management teams struck an upbeat tone on forward guidance. The combination of leaner cost structures and reaccelerating demand has offered a boost to earnings estimates for the year ahead.



The Magnificent 7 is expected to continue to outpace the earnings growth of the broader market. Consensus expectations for YoY earnings per-share growth for 2024 and 2025 show that the Magnificent 7 companies are expected to outpace the broader market. For the Magnificent 7, 2024 growth was 25% and 2025 growth was 15%. For the remaining 493, 2024 growth was 8% and 2025 growth was 13%. For the S&P 500, 2024 growth was 11% and 2025 growth was 13%. For the S&P 400, 2024 growth was 7% and 2025 growth was 15%.



In conclusion, the stunning rally in Big Tech stocks has propelled the Nasdaq to 20,000, with the Magnificent 7 stocks accounting for nearly 30% of the S&P 500 market cap. Earnings growth, reasonable valuations, and AI potential have driven this momentum. Earnings growth is accelerating, with the Magnificent 7 expected to outpace the broader market in 2024 and 2025. Valuations remain reasonable, with forward P/E ratios in line with the 10-year trailing average. AI potential is accelerating, with these companies both enablers and beneficiaries of the AI craze. However, not all companies in the group have shined equally, with Tesla falling out of the top ten list of the world's largest companies. As market concentration increases, investors should monitor the performance of these megacap tech companies and consider the potential risks and opportunities they present.
Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.