By Richard Williams, QuotedData, 29 January 2024:
Being underweight the ‘Magnificent Seven’ would have made for a painful 2023. The seven US mega-cap technology stocks – Microsoft, Apple, Alphabet, Meta, Nvidia, Amazon, and Tesla – were collectively up 80% over the year, while the remaining 493 stocks that make up the S&P 500 index were relatively flat at around 5%.
The seven’s domination of the US market was in some part based on the boom in artificial intelligence (AI) and its future growth potential. However, some investors have started to question the sustainability of the lofty valuations at which the seven now trade – at an average price to earnings (P/E) ratio of 53 at the end of 2023, which is approaching the tech bubble levels of the late 1990s and early 2000s.
Investor caution may stem from the many false dawns in the tech sector over the ensuing 20-odd years. The all-encompassing potential of AI, however, leads me to believe that we are only just getting started when it comes to growth, but a broadening of stock performance away from the Magnificent Seven can be expected.
The pace of AI innovation over the past couple of years has been vast – as witnessed in the capabilities of OpenAI’s ChatGPT-4 model over its 3.5 predecessor. AI has the potential to influence all aspects of our lives, but the ramifications for the labour market are most hotly debated.
Goldman Sachs estimates that two-thirds of US jobs are exposed to AI automation. That doesn’t necessarily mean a mass cull of jobs. The adoption of AI could free an employee of the time-consuming and mundane elements of their job, allowing them to focus on the more creative, value-add parts.
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