What’s Next for Tech Stocks Now That Microsoft Has Overtaken Apple?

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A beacon of change has been lit within the tech industry. In other words, Apple has lost its status as the stock market’s most valuable public company, replaced by fellow “Magnificent 7” member Microsoft.

The switch brings to an end Apple’s nearly continuous decade-long reign as the Wall Street leader of big tech and the largest company in the S&P 500. The news signals big changes within the tech industry itself brought about by the popularization of AI, but does it change the outlook for tech stocks? Here’s what investors should know.

The tech stocks ‘flippening’ is AI-driven

In mid-January, Apple was overtaken by Microsoft as the most valuable public company in the world. At press time, the market capitalization, or total value of shares, for Microsoft was $2.92 trillion to Apple’s $2.91 trillion.

On one hand, this is major. Since 2011, Apple has consistently held its status as the world’s most valuable company by market cap, only being overtaken sporadically during that period. This most recent flip is the first time Microsoft’s value has overtaken Apple’s since 2021.

On the other, by no means is this news a sign that Apple — or big tech as a whole — is weakening. The company’s stock has appreciated by 39% in the past 12 months, and the largest seven tech stocks are all among the top of the S&P 500 index by weight. Tech stocks have proven to be a safe haven for investors roiled by volatility; in 2023, the strength of these stocks alone was enough to lift major indices toward some of their best years this century.

That’s thanks in large part to the growing popularity of artificial intelligence. While we are still early in the development of this technology, the speculative attractiveness of AI-centric investments has driven demand for tech stocks in the last year. Nvidia, for example, saw a 213% upshoot in stock prices in the last year, largely due to the hype around its AI-training computer chips.

Microsoft’s overtaking of Apple, then, doesn’t come as a huge surprise, especially when considering the divergence in how both companies are handling the AI boom.

“Microsoft has invested a tremendous amount of capital into its AI-focused sectors in recent years,” says Juan Bruce, co-founder of blockchain startup DSCVR. “I think we’re seeing this play out in terms of the recent ‘flippening’ of Apple in terms of market capitalization.”

Indeed, Microsoft has been leading the AI charge in many respects, incorporating AI across its existing product suite and working collaboratively with ChatGPT developer OpenAI to train its model on a supercomputer. Apple, meanwhile, has been slow to incorporate AI into its business in a successful capacity (so far) while dealing with lukewarm demand for and legal issues concerning its existing products.

Experts are divided on tech stocks’ value

It’s true that big tech has been the star of Wall Street for several years now — but can that phenomenon last?

In December, Money talked to a group of experts about their 2024 investing outlooks; tech stocks were a main point of contention, with some arguing that they had gone beyond their fair value and others arguing that the industry was too big of a changemaker to burst. It’s natural to ask, then, how the Apple-Microsoft news factors into the sector’s market outlook.

For some, the answer is “not much.” Last month, Morningstar analyst David Sekera released a note advising investors to take profits and shed their portfolios of tech stocks. Sekera named Apple specifically as one of the more overvalued players, and the recent news does little to change his view.

“We continue to view Apple as overvalued,” Sekera tells Money, adding that Morningstar projects low and slow revenue growth for the company over the next five years.

At the same time, the firm rates Microsoft as a fairly valued play, owing explicitly to its continuing growth into cloud-based computing and AI. But in general, Sekera says, tech is bloated.

“We think now is a good time to look to lock in some profits on those overvalued stocks that have become overextended in the tech sector and use those proceeds to reinvest in other areas of the market,” he says.

Others, especially those within the tech industry themselves, believe that the sector can continue to deliver returns to investors for a while yet.

“The world is very tech-forward right now, and huge leaps and bounds are being made in terms of innovation and breakthroughs,” says Phillip Shoemaker, executive director at tech nonprofit Identity.com. “The tech sector is trying to tackle so many things at the same time that it’s hard to say it’s overvalued given the huge impact on the world.”

For now, though, large stock indexes continue to weigh tech heavily within their portfolios. And they’re expected to carry the S&P 500 through the ongoing fourth-quarter earnings season for 2023.

Finance research firm LPL Research’s Tuesday note says that the Magnificent 7 stocks are expected to collectively grow earnings by 46% in the fourth quarter. Simultaneously, the firm expects the other 493 stocks to see a 7% earnings decline.

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