U.S. Stocks on Track for Fifth Consecutive Weekly Decline
The “Magnificent Seven” stocks are experiencing their longest losing streak since 2022, as fears of a U.S. recession and overspending on artificial intelligence continue to weigh on the group. Despite the recent selloff, analysts believe that this pullback is a natural correction and presents an opportunity for investors.
The Magnificent Seven, a group of stocks that have fueled market gains for over a year, are currently facing their deepest pullback since being named in 2023. The Roundhill Magnificent Seven ETF (MAGS) has fallen 15.5% from its all-time high on July 10. One Mag Seven index is on track to record its fifth consecutive weekly decline, the longest losing streak since December 2022.
Nvidia (NVDA), the poster child of the group, has seen a decline of over 20% from its recent peak. The stock is on track to close lower for the week, failing to stage a comeback similar to the one it experienced last Wednesday when it jumped 13% after a significant selloff.
The Mag Seven stocks have been hit by a triple whammy in recent weeks. First, a soft inflation report on July 11 sparked speculation that the Federal Reserve would cut interest rates as early as September. This led to a rotation out of cash-rich mega caps into small caps, which stand to benefit most from rate cuts.
Second, Wall Street focused on the Mag Seven’s surging artificial intelligence (AI) spending in recent earnings reports. This overshadowed otherwise solid results, causing shares of Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN) to tumble. Alphabet announced plans to continue ramping up AI infrastructure spending in 2025.
Lastly, the unwinding of the yen carry trade, a popular investment strategy in recent years, triggered a broad selloff that pushed Mag Seven stocks further into correction territory.
Despite the recent downturn, analysts view this pullback as a natural and healthy one. Historical data shows that stocks experience pullbacks and corrections regularly, even in positive years. George Smith, a portfolio strategist at LPL Financial, stated that 94% of the years since 1928 have seen a pullback of 5% or more, and 64% have had a 10% correction. He advises investors to be patient, stay invested, and not panic.
Some analysts see the recent dip in Mag Seven stocks as a buying opportunity. Morgan Stanley analysts argue that the group’s current valuation is historically attractive, assuming earnings growth expectations hold up. They note that the Mag Seven trades at a discount to its trailing five-year valuation average, with expected forward EPS growth outpacing the trailing five-year growth. This implies a median Mag Seven forward PEG ratio of 0.8x compared to a trailing PEG ratio of 1.3x.
While a soft landing is their base case, the analysts acknowledge that a recession would significantly alter the outlook for tech earnings. However, the group’s cost discipline has contributed to resilient earnings, putting them on relatively solid ground. Additionally, based on first-quarter 13-F filings, most of the Mag Seven stocks appear to be under-owned relative to their market weight. This relationship between low active ownership and future stock performance is statistically significant.
In conclusion, the Magnificent Seven stocks are currently experiencing their longest losing streak since 2022. However, analysts view this pullback as a natural correction and an opportunity for investors. The group’s current valuation is historically attractive, and their cost discipline has contributed to resilient earnings. While economic and political uncertainty continues to loom over financial markets, staying invested and not panicking is advised.
