The group of outperforming US tech stocks, The Magnificent Seven, were responsible for much of the gains of the S&P 500 in 2023. However, J.P. Morgan Asset Management (JPMAM) believes it is now time for investors to look to the other 493 stocks and pick winners and losers among the seven, as, after all, not all cowboys survive to the closing credits.

During her recent visit to Hong Kong, Susan Bao, JPMAM portfolio manager, said that the firm is still constructive on the US market in 2024.

“It’s interesting, everybody talks about the boom in the US. The reality is in 2022, the US market was down over 18%, we had a massive rotation from growth to value, and tech was one of the worst-performing sectors. A lot of the defensive sectors actually outperformed in 2022,” Bao told Asian Private Banker. 

She added that in 2023, the market jumped over 24%, which is interesting because it was the “mirror image” of each sector. “The best-performing sector was tech [last year], we have got the semi-stocks that went up 45%, and the defensive sectors underperformed,” she explained.

Year-to-date, the US market is already up over 7%, which Bao describes as “pretty strong.”

“We are still constructive on the [US market] because at the end of the day, the markets are driven by economy and earnings, and we are quite constructive on the US economy,” she highlighted.

It’s time to retire the Magnificent Seven, says JPMAM

Don’t forget the other 493 stocks

The biggest rally in the US stock market since late last year and this year, comes from the top tech stocks known as The Magnificent Seven, comprising Meta, Alphabet, Microsoft, Amazon, Apple, Nvidia, and Tesla. But in Bao’s view, clients should try to look beyond the seven.

“The last year’s return of 26% of the US market, [the] majority come from the Magnificent Seven. But I will say that we should retire the name this year. [Because] not every Magnificent Seven name is created equal,” she pointed out.

Bao added that the name actually comes from the Western movie The Magnificent Seven, and not all cowboys survive to the end.

She explained that as a group, the Magnificent Seven shows promising earnings growth of a high 20% this year, with a forward P/E ratio also a high 20x.

“However, we cannot view them as the same group at this point. There’s a massive dispersion from a fundamental perspective. YTD, we have already seen dispersion although they all went up a lot last year,” Bao said.

She highlighted that this year is also the year that investors need to be active and pick and choose the winners or losers amongst the Magnificent Seven.

“Don’t forget there are 493 other names in the S&P 500 and it’s critical to spend more time on the 493. And why? Because the other 493 stocks last year went through an earnings recession, but we expect them to grow earnings between 6-8% this year. So from a minus 5-6% to 6-8% [growth], that’s a double-digit improvement.”

“So, we actually expect more contribution from the 493 stocks as we look at 2024 and potentially 2025.”

In terms of interesting sectors apart from tech, Bao highlighted that healthcare, selected industrial companies and energy names could be where investors find good opportunities.

Solid economy and earnings

While many are suspecting the US may enter a slower growth year in 2024, Bao believes the US economy is still looking strong.

“When we look at the component of US GDP, about 70% is consumption, that means for the US, consumers love to spend money. When we look at the health of the US consumer, I will use one word, which is resilient,” she said.

Bao highlighted that the current employment rate is still pretty low, and the US has a solid labour market and real income, with gasoline prices and the housing market stable.

“So, in the aggregate, we look at US consumers as quite healthy, which means that will provide a pretty solid foundation for the US economy.”

On the earnings side, she said the research team at J.P. Morgan expects this year and the next to see a double-digit EPS growth, which is solid.

Magnificent Seven outperformance to end, says VP Bank’s Asia CIO