Magnificent 7 stocks: What Apple, Amazon, Meta, Google, Microsoft, Tesla earnings tell us?

Last night, the world’s biggest company by market reported its latest financial results. Investors were on the edge of their seats as Apple Inc announced earnings – but so were the world markets.

Now, almost all of the mightiest American companies, those Silicon Valley legends known as the ‘Magnificent 7’, have reported their Q1 results. Only Nvidia remains, which will report on May 22nd.

So, what can we tell from the combined six results – not just about the companies themselves, but about USA markets as a whole? 

Quite a lot, according to analysts.

From bullish to bearish: analyst prediction

“It feels as if we’re in a transition stage between relentless bullishness to a more bearish feel to market sentiment,” says David Morrison, Trade Nation analyst. Speaking on rising inflation and the Fed’s continued radio silence on interest rate cuts or hikes, he adds that:

Ever since the latest leg of the rally began last October, bad news has been shrugged off while good news has been disproportionately rewarded. It now feels as if the polarities are on the cusp of reversing.”  

He has a point. At the beginning of the year, markets were giddily anticipating up to six or even seven interest rate cuts. And then, the inflation stuck around and just kept getting stickier. Now, we may be lucky if we get one all year – and some at the Fed, like Kashkari, think that interest rate hikes should be rolled out again instead.

But how will the financial markets in the US at large react to all of this? One of the biggest bellwethers – quite literally – are the Magnificent 7 stocks. These all-American, mega-cap companies make up a significant portion of all the most influential US indices around. What they say about growth prospects matters.  

The proof in the earnings pudding

And it just so happens that we have some very recent comments from almost all of them, thanks to earnings season.

Fast food chain giant McDonald’s directly attributed its financial results to inflation, saying that the general public is now “more discriminating with every dollar that they spend as they face elevated prices in their day-to-day spending.” 

Coca-Cola similarly cited “markets experiencing intense inflation” in its earnings, which saw the company experienced a whopping 36% drop in operating income. 

These two stocks – historically known to be quite resilient to difficult economic environments – are just two examples of the many that reported subdued earnings in the past month. 

Headwinds ahoy

Daniel Grosvenor, director of equity strategy, macro forecasting & analysis at Oxford Economics, also points out that some sizable macro headwinds are lurking, more for the Magnificent 7 than perhaps anyone else. These include threats both abroad and at home.

These stocks could also be vulnerable to a rise in policy uncertainty ahead of the US Presidential election. The tech sector remains under the regulatory spotlight from an antitrust perspective, and this is likely to be a key issue for the Democrats on the campaign trail. The Magnificent 7 could also be exposed to an increase in uncertainty over trade policy. As a group they generate a much higher proportion of their revenues outside of the US than the broader S&P 500 universe, and they have meaningful exposure to mainland China and Taiwan. In recent years their relative returns have had a negative correlation with measures of trade uncertainty, in line with other globally-oriented companies.”

Well, if there were two words that could sum up all the various headwinds the markets have faced in the past couple of years, “trade uncertainty” would be a strong contender.

Long-term implications

And according to Grosvenor, this poses a risk not just for these seven titans, but for the entire equities market as well.

Although there are few signs that the performance of these stocks is fading, the dominance of such a small number of firms and the high degree of correlation between them increases risks for investors. A reversal in their fortunes could weigh heavily on the overall market and on investors’ trading strategies which have been leveraging their strong momentum.”

Is this where the markets are heading? Presumably, we’ll have to wait for Nvidia’s earnings to see.

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