Is the “Magnificent 7” overvalued?
If you’re exhausted with that query, you’re not alone. I’m likewise weary. Enervated even. Particularly given the veritable constellation of divergent answers to what should be a “yes or no” question.
Given JPMorgan’s long-standing defensive stance amid a rally that stubbornly refuses to bend, let alone break or die, it might surprise you to learn that the bank doesn’t necessarily view valuations among the market’s heavyweights as problematic, or at least not relative valuations.
“Even though we accept that in absolute terms Magnificent 7 valuations are elevated, as is the performance in both absolute and relative terms, Magnificent 7 stocks have generally de-rated vs their five-year averages,” the bank’s Mislav Matejka noted on Monday.
The simple figure above gives you a sense of where the constituents trade versus their respective half-decade medians, a period which admittedly includes an egregious bubble (2021).
So, only Meta and Microsoft trade rich to their own recent history.
Relative to the rest of the market, the Magnificent 7’s not especially stretched either versus its post-pandemic premium.
On that score, Magnificent 7 names “are trading cheaper today than a few years back, despite the exemplary performance,” Matejka remarked.
Of course, when you talk about forward multiples you’re talking about expectations. And when expectations are lofty, they’re harder to realize. Some continue to worry the Magnificent 7, or at least some of the group, are actually cyclicals masquerading as growth stocks.
Matejka’s sympathetic to that. But only to a point. “This is not to say that the group is immune to profit disappointments ahead, and it could prove to be more cyclical than many currently assume,” he wrote, before quickly adding that “in the case of general earnings disappointment, these stocks could still hold out better than traditional Cyclicals.”
Every time I read one of these assessments that say, “These [current] prices really aren’t so bad,” I can’t help my mind’s running back to the late 1990s and the so-called dot.com era. Prices were supposedly OK the, too. I recently sold a lot of my LLY, a company with a market cap of $750 bil, more than 20x sales and 23x what I paid for it. If that’s not animal spirits I don’t know what is. I’m just too old for this #@&%. For the first time in my life I’m raising cash, at no opportunity cost. Just dead lucky I can do that for now, at least.
NVidia is trading on a prospective PE of 35x, which is not too bad. But, don’t look at the earning growth rate supporting that at 90%!