LPL Financial: "The performance of the "magnificents" will exceed that of the market this year as well"

The performance of the seven so-called "magnificent" tech giants should continue to outperform the other 493 stocks in the S&P 500 index, believes Jeffrey Buchbinder, chief equity strategist at LPL Financial, writes Business Insider.

According to the strategist, the main reason why these companies' stocks have outperformed the market over the past year is strong earnings growth. "Do not underestimate the importance of the Magnificent Seven," Buchbinder wrote in a recently published note.

Last year, more than 60% of the S&P 500's 25% gain was driven by the performance of the "biggies," which include shares of Apple, Microsoft, Amazon, Alphabet (Google's parent company), Nvidia, Meta Platforms (formerly Facebook) and Tesla. Under these conditions, some Wall Street strategists are advising investors to buy shares of smaller companies, while others believe that the big names in technology still have significant room to grow.

"Essentially right now the mags are single-handedly driving the earnings growth of the entire market," Buchbinder said, noting that this is despite the fact that together they make up about 28% of the S&P 500.

Expectations are for the group to report profits up 46% for the fourth quarter on last year, while the other 493 companies in the index are expected overall to see a 7% drop in profitability. In fact, it's a situation that also occurred in the second and third quarters of last year, according to Business Insider.

Buchbinder believes this trend will continue throughout this year as the AI revolution gathers momentum. "We expect results to be solid given that estimates for this group have been revised upwards in recent months and excitement around AI continues to grow," said LPL Financial strategist.

It's a view shared by Goldman Sachs' chief US equity strategist, who argued late last year that big tech names will continue to outperform the rest of the market in 2024. "Analysts estimate that the tech giants will have a sales CAGR of 11% through 2025, compared to just 3% for the rest of the S&P 500. The Big Seven's margins are twice as high as margins of companies in the rest of the index, and consensus estimates are that this gap will persist through 2025," Goldman's David Kostin said, according to Business Insider.