The market is currently pricing in up to three rate cuts this year, which is putting pressure on Magnificent 7 stocks, defined as Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla. Due to their global exposure, heavy cash positions and positioning within the growing AI trend, they have been perfectly situated to benefit from a bifurcated and complex macro environment. Because of this, the Mag 7 has significantly outperformed the broad market, and also led it higher for nearly 2 years.
To put this into perspective, the first six months in 2023 was the biggest 6-month rally in Nasdaq history - and since then, over a year ago now, the NASDAQ has plowed through key levels to reach a staggering 72% return in a little over 21 months. It’s not only the returns we’ve seen in 2023 and 2024 that are unusual, but the fact it happened back-to-back. Tech investors can thank the Mag 7 for this spectacular outperformance.
However, we are now getting evidence that a change is happening. As excitement over reduced rates has investors rotating into beaten down small caps and consumer facing stocks that have sat out tech’s historic rally.
By not participating, small caps and other pockets in tech that are more traditionally cash-strapped are now undervalued. Optimism around the Fed could spark a continuation of the relief rally in the Russell 2000 and further rotation out of the Mag 7. Below, we look at the pros and cons of a Mag 7 rotation and how we plan to personally handle this shifting landscape.
Why The Mag 7 Worked
The complexity of this business cycle can’t be overstated. On one hand we are seeing one of the longest and steepest yield curve inversions in market history. This signal has a near perfect track record of predicting recession, which is being backed up by a weakening consumer, and a deep and prolonged manufacturing recession that is now filtering into the services sector. On the other hand, corporate profits are healthy, the job market remains relatively tight, and AI is creating a new economy that is driving historic top line and bottom line growth for the AI leader (we think there will be many moremany more beneficiaries beyond Nvidia).
This bifurcation within the economy can be seen in equity markets. For example, markets that are dependent on a strong consumer, thrive with lower interest rates, or in need of cheap money to expand - like high beta tech, small caps, real estate, consumer discretionary - are still well below their 2021-2022 highs.
At the same time, we are seeing markets that have global exposure, flush with cash and are not dependent on the consumer, all well above their 2021-2022 highs. This is most obvious with the Mag 7, who were leading this market higher in early 2023, and continuing into today.
For this reason, we need to take a closer look at select charts within the Mag 7 to get an idea on where the market is going over the short-term, as well as the medium to long-term.
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Certain Stocks Within the Mag 7 Continue to Provide Clues
Our broad market analysis in 2024 has been focused on the relative performance of the Mag 7. Without question, these 7 stocks are the most important stocks in the current bull market. Historically, as long as the cycle leaders continue to move higher with the market, all is well. However, as stated in our March Report…
“When the cycle leaders start to underperform, it tends to mark the start of a trend change. The Magnificent 7 have been the undoubted leaders of this bull run, and we are now seeing them start to trend lower against the indexes. More times than not, the leaders on the way up, tend to be the leaders on the way down.”
This was the pattern that warned us about the April selloff, and again in July.
What followed our March report was a 6.3% drop in the broad market. However, high fliers like NVDA and META dropped 22%, TSLA dropped an additional 32% while the rest of the Mag 7 dropped between 15% - 10%.
Since then, the market has recovered and resumed the bull market higher; however, we have seen new leadership emerge from the Mag 7. Since the April 19th low, the S&P 500 is up +12%, while Apple is up 32%, Nvidia is up 64% and Tesla is up 77%. Lead Tech Analyst, Beth Kindig, pointed out on Bloomberg Asia that Tesla was simply trading too low at the time, and to look for a bounce.
What is interesting is that the same pattern that we saw from the Mag 7 in early March, was also warning investors leading into the July 16th high.
Nvidia first started making lower highs on June 10th, followed by Tesla on July 10th, and then finally Apple on July 15th. So, while the broad market continued to make higher highs, it was doing so without its leaders, signaling that trouble is likely ahead.
What The Majority of the Mag 7 is Saying Now
The divergence above within the Mag 7 stocks warned us of the coming volatility. We can use further analysis of these important stocks to help tell us what the market may do next.
Of the Mag 7 charts, Apple, Microsoft, Nvidia, Amazon and Google are the clearest. They all suggest that what we are seeing is a correction within a larger uptrend, and that it is likely that we see higher levels in the coming weeks. While Meta and Tesla can be interpreted in the same way, they are not as clear as the ones we will discuss below. For reference, the 5 stocks below account for ~28% of the S&P 500, and should have a very strong correlation on the direction of the broad market over the coming weeks to months.
Nvidia
Nvidia is the most important stock in the current bull market. Within the most recent bull market, it has gone from a top 25 stock in the S&P 500 to now the 2nd most valuable company in the U.S. due to its positioning within the new AI trend. Our firm was the first to lay out NVDA’s path to becoming the most valuable company in the world. Now that it has surpassed Apple, we further presented how it has a clear path to becoming a $10 Trillion Company by 2030.
Since the 2022 low, NVDA has been tracing out a very large 5 wave pattern higher. Note the vertical move higher in early 2024. This was met with max volume and max momentum to the upside. This is the marker that you are in the most powerful moment of a trend, which is the 3rd wave. This is also around the halfway point of the entire 5 wave pattern.
The pattern appears to be incomplete. Even though NVDA topped early, the drop is a clean 3 wave pattern within an incomplete uptrend. We still need a 5th wave to new highs in order to complete the larger 5 wave move.
Nvidia may have one more drop into the $113 region before bottoming, but appears to be developing a bottom right now. Look at the momentum indicator below. It is bottoming in the exact same region the April low tagged, and it is doing so while price is much higher. These are the type of bottoming signals we look for when degerming a low is close within a developing uptrend. As long as any further drop holds $103, we expect NVDA to push higher.
Apple
With Apple’s push into bringing AI to the consumer, coupled with the likelihood that the Fed will lower rates soon, Apple has stopped becoming a laggard and is instead one of the leading Mag 7.
It appears to be a bit further along in its uptrend pattern off the 2022 low. While NVDA needs a large degree 5th wave, Apple is missing a smaller degree 5th wave. Like NVDA, the pattern is incomplete while giving us clear bottoming signals.
Note how the momentum indicator is making a lower low from the June low into today’s low. This is happening while price is making a higher low. This is the type of pattern we see in on-going uptrends, and supports that we should see another swing higher into late summer/early fall. As long as Apple hold over $206, we expect to see this move higher manifest.
Microsoft
Our firm recently closed MSFT for a sizable profit due to valuation concerns. While the chart does suggest it has one more swing higher, we see other stocks within tech having more upside in both valuations and technical targets. For this reason, we have rotated these gains into Nvidia, as well as other AI stocks that we have been targeting for months.
However, like Apple and Nvidia, Microsoft is a bellwether for the broader market and an important stock to cover. It is very rare to see MSFT move against the market, and when it does, it is a sign of a brewing trend change.
The below chart shows a very mature uptrend off the 2022 low. We have a very large 5 wave pattern that is suggesting it has one more swing left. This would be wave 5 of a larger 5th wave, and is estimated to be anywhere between 8 – 15%.
