The Magnificent 7 Mega-Cap Techs Lead US Stock Markets to Record Highs in Q2’24
The biggest US stocks dominating markets and investors’ portfolios just reported a truly-spectacular quarter. Their collective revenues neared record levels, driving their highest earnings ever witnessed. Yet despite all that, risks abound. The US stock markets have never been more concentrated, relying on fewer and fewer companies. Valuations remain deep into dangerous bubble territory, and market fragility signs are mounting.
The flagship US stock index has enjoyed a banner 2024, blasting up 18.8% year-to-date in mid-July. Traders’ fascination with mega-cap techs involved in artificial intelligence fueled fully 38 new record-high closes this year, over 1/4th of all trading days. The resulting greed and euphoria have left the SPX chronically- and extremely-overbought, mostly stretching far above its baseline 200-day moving average.
Since this latest mighty upleg started powering higher in late October, there had been only one minor pullback until last month. Over several weeks in April, the SPX retreated 5.5%. By mid-July, the SPX had soared an impressive 37.6% higher in just 8.6 months. At that latest record high, the S&P 500 had shot way up to 1.149x its 200dma. Q2’24’s earnings season was getting underway and looking fantastic.
Normally earnings beats stoke bullishness fueling nice rallies in big US stocks. But the SPX ignored them to fall 4.7% into late July. Then Japan’s extraordinary market chaos spooked world traders last week, and the SPX plunged again deepening its pullback to 8.5% over several weeks. This selloff is threatening formal correction territory down 10%+, which would spawn increasingly-bearish sentiment among traders.
In just three trading days, the SPX plunged 6.1% to Monday’s latest pullback low. Inarguably that was Japan-driven. Those were the same few days after the Bank of Japan hiked its rate from a 0.0%-to-0.1% range to “around 0.25 percent”, to attempt to reverse its plummeting yen. That currency had collapsed 14.7% YTD by early July, hitting its worst levels relative to the US dollar since way back in December 1986.
That weaker was stoking price inflation, forcing import prices higher which Japan heavily depends on. But that mere 15-basis-point rate hike started unwinding the enormous global yen carry trade. Traders borrow yen for next to nothing, convert it into other currencies, and buy higher-yielding assets including US mega-cap-tech stocks. Unbelievably-heavy and brutal selling slammed Japanese stock markets.
Astoundingly in those three trading days after the BoJ’s little hike from almost zero, Japan’s benchmark stock index crashed 19.5%. That included a shocking 12.4% plummeting on Monday alone, the second-worst down day in Japanese stock-market history after Black Monday in October 1987. Fear soared globally, with the S&P 500’s implied-volatility fear gauge skyrocketing to 65.7 that morning.
Though anything over 50 flags extreme unsustainable fear which is always short-lived, the SPX still plunged 3.0% that day. While Japan’s stock-market action was crazy, I can’t recall Japanese stock-market fortunes ever mattering for American ones. That sure looked like a fragility warning, highlighting the precariousness of these lofty US stock markets. Their AI bubble may very well be starting to burst.
For 28 quarters in a row now, I’ve painstakingly analyzed the latest results just reported by the 25 biggest SPX components and US companies. Almost all American investors are heavily deployed in these behemoths due to fund managers crowding in. How big US stocks are collectively faring fundamentally offers clues on what markets are likely to do in coming months. This table includes key SPX-top-25-component results.
Each of these elite companies’ symbols are preceded by their SPX rankings changes over this past year, and followed by their index weightings exiting Q2’24. Next comes their quarter-end market capitalizations and year-over-year changes, revealing how these stocks performed. Looking at market caps instead of stock prices helps neutralize the distorting effects of massive stock buybacks artificially boosting prices.
Next comes a bunch of hard accounting data directly from 10-Q reports filed with the SEC. That includes each SPX-top-25 component’s quarterly sales, earnings, stock buybacks, dividends, and operating cash flows generated. Their quarter-end trailing-twelve-month price-to-earnings ratios are also shown. YoY percentage changes are included unless they’d be misleading, such as comparing positives with negatives.
Overall the big US stocks’ Q2’24 results proved phenomenal, confirming why these companies are the best. But despite their continuing size-defying growth, troubling signs abound. These include extreme concentration, extreme overvaluations, and the overwhelming probability that these outsized growth rates aren’t sustainable. That’s even riskier if the US economy slows down as Americans struggle with inflation.
For years US stock markets have been starkly bifurcated, with the legendary Magnificent 7 mega-cap techs radically outperforming everything else. Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta, and Tesla are universally-loved, averaging mind-boggling $2,287b market caps exiting Q2. These giants are now responsible for a record 32.7% of the SPX’s entire weighting, exceedingly-risky off-the-charts concentration.
That catapulted the SPX top 25’s weighting to 50.2%, also the highest ever witnessed. That’s effectively half the US stock markets, with the Mag7 alone a third. Whenever some subset of these mega-cap techs inevitably suffer heavy selling, they will drag down the broader markets with them. This Monday’s Japanic was a great case in point, with global fear peaking about an hour before US stock markets opened.
At worst soon after, the SPX was down 4.3% intraday. But the comparable losses in MSFT, AAPL, NVDA, GOOGL, AMZN, META, and TSLA were much worse at 5.6%, 10.9%, 15.5%, 7.0%, 9.7%, 7.6%, and 12.4%. Mega-cap techs leading to the downside was even more pronounced during recent weeks’ 8.5% SPX pullback. From their own recent-month closing highs to latest lows, they also plunged way farther.
MSFT, AAPL, NVDA, GOOGL, AMZN, META, and TSLA suffered ugly outsized 15.5%, 11.7%, 26.7%, 17.2%, 19.5%, 16.0%, and 27.2% losses so far in this pullback. And those will deepen if the SPX keeps rolling over into a 10%+ correction or a deeper 20%+ new bear. Market-darling stocks that leverage the SPX on the way up also amplify it on the way down. All that recent selling came despite fantastic Q2 results.
Amazingly given their vast sizes, the Magnificent 7’s aggregate revenues soared 15.3% YoY last quarter to $473.8b. That’s an incredible achievement, which these great companies sure deserve credit for.
Analysis: The Q2’24 results of the Magnificent 7 mega-cap tech companies have propelled the US stock markets to record highs. However, the extreme concentration and overvaluations within these markets pose significant risks. As the market continues to be dominated by a few key players, any downturn in these mega-cap techs could have a cascading effect on the broader market. Investors should be cautious of the fragility in the market and the unsustainable growth rates of these companies, especially in the face of potential economic slowdowns and inflation concerns.