Tech stocks have had a strong start to the fourth quarter, buoyed by optimism that the Federal Reserve is close to the end of its rate hike cycle and better-than-expected quarterly from the "Magnificent Seven" stocks, consisting of Alphabet (GOOG , GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA).
As of Tuesday's close, the S&P 500 index is up 19% year to date and is just 1.2% away from a new 52-week high. The index has risen roughly 10% in about two weeks, thanks to the latest CPI report that showed inflation is being contained. While the inflation is not yet at the Fed’s 2% target, the latest reports provide strong arguments for no further rate hikes. As I said recently, I believe the Fed is done raising interest rates.
Further more, I believe a rate cut is in the cards at some point in the first quarter of next year. From there, it’s not hard to imagine for three more rate cuts to follow by the end of the 2024, affirming the arrival of the long-awaited Fed pivot. With that in mind, it's more than likely that tech stocks, particularly the Magnificent Seven, will continue to post strong returns for the remainder of the year and into the first quarter.
Immediately, I can hear the bearish argument about tech stocks and their valuations. But what is often overlooked in the bearish thesis, which usually focuses solely on stock prices, is that fact that their profits are also growing. What’s more, the "Magnificent Seven" cohort are enjoying growth tailwinds that are still in the early stages. For Microsoft and Nvidia, they are leading the way in artificial intelligence (AI) technology.
The profit potential in AI is staggering, with the generative AI market currently experiencing a 42% growth rate and the potential to reach $1.3 trillion by 2032, according to Bloomberg Intelligence estimates. Even with these estimates, Microsoft was identified as the most under-owned large-cap tech stock this quarter, according to Morgan Stanley’s U.S. Tech report, published on Monday.
Among largest-cap tech companies they cover, Morgan Stanley tracks institutional ownership data to assess how widely-owned these companies are, “based on each company's average weight within the top 100 actively managed portfolios relative to the same company’s weighting in the S&P 500.” Microsoft was identified as the most under-owned, despite the stock reaching new all-time highs.
Aside from Microsoft, Morgan Stanley listed Apple, Nvidia, Amazon and Alphabet — four other Magnificent Seven stocks as being under-owned. As for Apple, which continues to expand its installed base each quarter, the company will benefit from solid iPhone demand across the globe. Having just launched the iPhone 15 and introduced its mixed reality headset earlier this year, Apple is poised to set new quarterly install base records in several emerging markets.
Google and Meta Platform will benefit not only from their own AI initiatives, but also a rebound in digital advertising. While some caution against sticking with these stocks due to market trends and naysayers, their track record speaks for itself. Their exposure to high-growth technologies, substantial cash reserves, robust cash flows, and strong leadership positions them to outperform the S&P 500 and powering tech in the last quarter of the year.
As such, I expect tech to power the S&P 500 index to a new all-time high by the end of calendar 2023, and for that momentum to sustain as the Fed ends it rate-hike campaign and pivot toward enacting rate cuts sometime in the firs quarter.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.