Mag 7 Stock Valuations Hit a Decade-Low Premium, Morgan Stanley Says
Complete. Here is the key summaryMorgan Stanley reports that the 'Magnificent Seven' tech stocks are trading at a decade-low premium to the rest of the S&P 500, despite maintaining a 45% earnings growth advantage. The firm suggests these stocks now look 'downright cheap' compared to semiconductors and advises investors to reduce semiconductor exposure in favor of mega-cap tech leaders like Amazon and Alphabet. Analysts identify Nvidia as having the most upside potential among the group.
The Magnificent Seven stocks are now the cheapest they've been in more than a decade after a difficult year for mega-cap tech. Indeed, according to Morgan Stanley Wealth Management (MS), Nvidia (NVDA), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), Apple (AAPL), and Tesla (TSLA) are starting to look more attractive again.
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Explore AMZO for 2X short leverage on AMZNSpecifically, the firm says that the valuation gap has narrowed sharply, and the Magnificent Seven now trade at only a 10% premium to the other 493 stocks in the S&P 500 (SPY). For context, this is the lowest premium in more than a decade. At the same time, the group still has a 45% annual earnings growth advantage.
This decline in valuation premium comes after investors moved their money into chip and memory companies. In fact, the iShares Semiconductor ETF (SOXX) has jumped roughly 85% this year due to the demand for AI data centers and compute infrastructure. In contrast, the Magnificent Seven stocks have faced more skepticism, especially as some companies take on debt to fund their massive AI spending.
'Downright Cheap'
Despite the spending concerns, Lisa Shalett, head of the global investment office at Morgan Stanley Wealth Management, said that hyperscalers now look "downright cheap" compared with parts of the semiconductor trade. Therefore, she suggested that investors reduce their semiconductor exposure and selectively move back into Magnificent Seven stocks that are best positioned to benefit from the next stage of AI growth.
Importantly, that next stage may be less focused on simply consuming more AI tokens and more focused on efficient hybrid AI systems. This could benefit cloud leaders like Amazon and Alphabet, especially if their custom-chip strategies reduce costs and improve performance.
Which Magnificent Seven Stock Is the Better Buy?
Turning to Wall Street, analysts think that NVDA stock has the most room to run out of the Magnificent Seven stocks. In fact, NVDA's price target of $309.33 per share implies 51.5% upside potential. On the other hand, analysts expect the least from TSLA, as its $399.71-per-share price target implies 1.4% upside. (See NVDA's Stock Forecast).