Time and again over the past two or three years, bears and market skeptics in general suggested big-tech (which is to say America’s mega-cap titans, irrespective of whether they’re technically classified as “tech”) might eventually be exposed as cyclical stocks masquerading as growth shares.

In fairness to that narrative, 2022 demonstrated that it is indeed possible for those companies to disappoint on the top-line. Of course, the comps were difficult: The stay-at-home boom and the 2021 economy made for a high bar, and it didn’t help that the Fed was aggressively hiking rates in 2022 just as revenue growth slowed to a crawl. If disappointing sales growth didn’t get you, the de-rating would.

Things turned around, though. As the figure below shows, revenue growth inflected for the better in recent quarters.

Meta last week scored the single-largest one-day value creation event in US stock market history, and although that gain was predicated mostly on the promise of larger cash returns to shareholders (more buybacks and a first-ever dividend), 25% top-line growth and a solid guide didn’t hurt.

The shares’ epic surge from the October 2022 lows speaks to another problem with dot-com-style crash predictions and dire tech narratives like the ones mentioned here at the outset: These stocks have already crashed. And spectacularly so.

The chart below shows Bloomberg’s “Magnificent 7” total return index.

Again: 2022 was a rough year, to put it mildly. If that’s not a crash, I’d hate to see what is.

One crash doesn’t preclude another crash, of course. But when you argue that the top 7 are due to collapse, don’t fail to mention the collapse we all just witnessed.

Relatedly, there’s no shortage of commentary regarding Magnificent 7 outperformance and the extent to which it “can’t last.” But, as Goldman’s David Kostin pointed out in his latest, “comparative returns are highly sensitive to the starting point.”

As the figure shows, when you incorporate the 2022 wipeout, the group’s outperformance versus the “S&P 493” is a mere 10ppt over the last 25 months, material to be sure, but not the kind of gap that relegates the rest of the index to also-ran status.

Please don’t misconstrue the message: The S&P 493 is an also-ran. My point, rather, is that the 2022 drawdown in the mega-caps is perhaps the least-remembered crash in modern history. The names that comprise a third of US market cap experienced an almost existential decline. Maybe the 50% drop for the group wasn’t existential, but Meta (to use the most poignant example of the boom/bust dynamic) was down more than 75% at the lows. That’s a veritable decimation — and nobody every talks about it. All we talk about is the idea that these shares are back in a bubble.

Let’s assume they are. Back in a bubble, I mean. They trade at 30x, after all, 12 turns richer than the rest of the index (figure on the left, below, from Goldman). What’s it going to take to sustain that without another crash? In a word: Sales.

As the figure on the right (above) shows, returns for the group over the past four years were primarily attributable to fundamentals, not multiple expansion. (Although, as noted, multiple contraction in 2022 was oppressive.)

“Bottom-up consensus expects the seven companies will collectively grow sales at a 12% CAGR through 2026 compared with an 3% CAGR for the remaining 493 companies in the index,” Goldman’s Kostin wrote, in the same note mentioned above.

Between that, and expectations for more than 250bps of margin expansion through 2026 (versus a relatively paltry 40bps for the index), it’s easy to make the bull case. Or at least to make the case that another crash isn’t in the offing, particularly if you buy any version of an optimistic AI narrative.

Of course, that begs the question (make sure you know what “begs the question” means, because a lot of people don’t) and brings us full circle. It’s all about estimates. And in that regard, Kostin didn’t shy away from the issue.

“Importantly, the Tech Bubble shows that investors believe consensus estimates at their own risk,” he wrote, adding that in Q1 of 2000, consensus expected Microsoft, Cisco, GE, Intel and Exxon to grow sales at a 16% CAGR over the following two years. The actual rate turned out to be barely half that, and as Kostin noted, “the group went on to underperform the S&P 500 by 21ppt over the next 24 months.”