This year is barely more than a month old but with a broad swath of S&P 500 member firms having already delivered fourth-quarter earnings reports, at least one thing is apparent: The magnificent seven are likely to be significant drivers of broader market earnings per share growth (EPS) in 2024.
That puts a spotlight on exchange traded funds that are heavily allocated to those marquee stocks, including the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM). Those ETFs entered this week with year-to-date gains of 4.64% — upside accrued in large part to stocks such as Microsoft (MSFT), Amazon.com (AMZN), and Alphabet (GOOG), among others.
Earnings reports that the trio and some of the other members of the magnificent seven, namely Meta Platforms Inc. (META), have supported early 2024 gains for QQQ and QQQM, but smart investors know that earnings reports are short-term events leading to the question “Can the magnificent seven continue dragging the broader market higher?”
The Answer Is…
For now it appears the magnificent seven, as they did last year to the benefit of QQQ and QQQM investors, can do the heavy lifting for the broader market as 2024 moves forward.
“Despite the nascent optimism that the rally could broaden to include other sectors and smaller stocks, the Magnificent Seven’s performance has an outsized impact on the market as a whole, along with the performance of the vast majority of investors’ portfolios,” noted Morningstar analyst Sarah Hansen. “Five of these stocks (excluding Apple and Tesla) were responsible for a staggering 98% of the index’s gains in January.”
If there is a potential stumbling block for the magnificent, it could be market participants regarding elevated valuations.
“Valuations, on the other hand, are a different story compared with a year ago. Heading into 2023, six out of the seven stocks in this category were considered undervalued by Morningstar analysts,” added Hansen. “Today only Apple makes the cut, while the rest of the group is considered fairly valued or expensive. For now, investors seem to be willing to pay a premium for well-established, profitable companies.”
On the other hand, the valuation might not plague these stocks and ETFs such as QQQ and QQQM. Why? Because these juggernaut growth companies are highly profitable and generate significant amounts of free cash flow. These traits are desirable even in a market environment that appears supportive of elevated risk-taking.
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