Strong sales growth will be the key to whether the “Magnificent Seven” group of U.S. tech and growth stocks can continue outperforming following their explosive gains in 2023, Goldman Sachs equity strategists said.
The Magnificent Seven -- Apple (AAPL-Q), Microsoft (MSFT-Q), Alphabet (GOOGL-Q), Amazon (AMZN-Q), Nvidia (NVDA-Q), Meta Platforms (META-Q) and Tesla (TSLA-Q) -- individually soared between around 50% and 240% in 2023, while collectively they accounted for over 60% of the S&P 500′s total return last year.
The group is also outperforming so far this year, returning 7.9% vs. 2.6% for the remaining 493 stocks, Goldman’s strategists led by David Kostin said in their weekly kickstart note.
The seven companies are expected to grow sales by a 12% average annual rate through 2026, against 3% for the remaining 493 companies in the S&P 500, Goldman said, citing consensus estimates.
“While elevated hedge fund positioning, numerous antitrust lawsuits from the DoJ and the FTC, and shifts in the macro regime will influence returns for the stocks, we believe that sales growth for the seven stocks will be the most important driver of the group,” the strategists said in the note.
Since December 2019, the Magnificent Seven have collectively had a 28% annualized return, the bulk of which was driven by improving fundamentals as opposed to valuation expansion, according to Goldman.
High valuations is the most common “pushback” Goldman hears from investors about the group.
However, Goldman said, the Magnificent Seven’s 63% price-to-earnings premium to the broader market is well below the peak 103% premium reached in 2021.
Meanwhile, the group’s “quality attributes” have helped insulate them from higher interest rates that have pressured other tech and growth stocks, Goldman said.
“The group outperformed in the high bond yield environment of the last 24 months in large part because of their strong balance sheets and elevated margins,” the strategists said.
Six of the seven companies have already reported results this period, with Nvidia set to report on Feb. 21.
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