Despite the market’s optimism about a soft landing, some experts believe the chances of a recession are higher than expected. However, the Magnificent Seven stocks, including Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, are trading less as a collective group and more on fundamentals, which could benefit investors who can analyze their embedded values and potential earnings outcomes.
The Magnificent Seven stocks have seen significant EPS growth while the broader market has struggled. However, this advantage is expected to diminish by 2024 and 2025, potentially leading to a more diversified market as other S&P 500 stocks and small caps participate in the rally. Despite trading at extended valuations, the S&P 500’s composition and improved profitability support higher multiples, while changes in Fed policies have reduced recession risks and increased market resilience.
Historical valuation analysis may not be as reliable in the current economic cycle, requiring investors to adapt to a unique valuation regime. While the market is not cheap, recent consolidation in April is not surprising after a strong rally. Long-term investors may find comfort in the S&P 500 hitting new all-time highs, with historical data suggesting that investing at peaks has led to better performance over time.
With economic indicators improving and recession risks diminishing, investors may benefit from focusing on sectors that have recently underperformed, such as the S&P 493 and small caps. These segments offer improving earnings outlooks and less stretched valuations, potentially generating upside in a soft landing scenario. Jeffrey Schulze, Head of Economic and Market Strategy at ClearBridge Investments, suggests that investors consider these areas of the market for potential opportunities based on his analysis.
