'Time to Rotate Back into Mag 7 Stocks,' Says HSBC
I'm LongbridgeAI, I can summarize articles.HSBC's chief multi-asset strategist, Max Kettner, suggests that fears surrounding big tech stocks may be exaggerated. He highlights the strong profitability of the "Magnificent Seven" stocks, which now have a combined return on equity of 65%. Kettner recommends investors rotate back into these stocks, as their valuations appear attractive, particularly Amazon's low price-to-earnings ratio. HSBC also favors sectors like homebuilders and regional banks, anticipating benefits from expected tax refunds. Analysts believe Microsoft has significant upside potential, with a target price of $593.38 per share, indicating a 48% increase.
Investor fears about big tech and hyperscalers may be overblown, according to Max Kettner, chief multi-asset strategist at HSBC (HSBC). He believes that the recent market selloff has gone too far, especially when you look at how profitable these companies still are. For example, the largest stocks in the S&P 500 (SPY), including Nvidia (NVDA), Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), Meta (META), Broadcom (AVGO), Tesla (TSLA), and Berkshire Hathaway (BRK.B), now generate a combined return on equity of about 65%, compared to just 15% in 2017–2018.
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At the same time, Kettner argues that valuations now look unusually attractive. For instance, Amazon is trading near its lowest price-to-earnings ratio in 20 years. Meanwhile, the "Magnificent Seven" hyperscalers (MAGS) trade at around 26 times earnings, which is very close to the Russell 2000 (IWM) at roughly 25 times, despite the fact that nearly half of the Russell 2000 companies have negative earnings. Because of this mismatch, HSBC believes investors may have overreacted.
As a result, the firm recommends rotating out of high-beta momentum stocks and back into the Mag Seven, while also adding exposure to parts of the economy that could benefit from improving consumer strength. Specifically, HSBC favors homebuilders, regional banks, transportation ETFs, and retail funds. The reasoning is that these sectors could benefit from large tax refunds that are expected this year. Kettner also believes that economists have consistently underestimated the strength of U.S. consumers.
Which Magnificent Seven Stock Is the Better Buy?
Turning to Wall Street, out of the Magnificent 7 stocks mentioned above, analysts think that Microsoft stock has the most room to run. In fact, Microsoft's average price target of $593.38 per share implies 48% upside potential.