The seven largest US tech stocks, colloquially known as the "Magnificent Seven," are trading at notably discounted valuations and could be poised for a turnaround, according to new analysis by Goldman Sachs (NYSE:GS). The group, which includes Apple (NASDAQ:AAPL), Microsoft (NASDAQ:NASDAQ:MSFT), Amazon (NASDAQ:NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Nvidia (NASDAQ:NASDAQ:NVDA), Tesla (NASDAQ:NASDAQ:TSLA), and Meta Platforms (NASDAQ:NASDAQ:META), is currently trading at a price-to-earnings-to-growth (PEG) ratio of 1.3, compared to 1.9 for the median S&P 500 stock. This marks the most significant discount since January 2017.
Despite a challenging year marked by rising interest rates and growing concerns about Federal Reserve policy, these tech giants have demonstrated resilience. Notably, shares of Nvidia have more than tripled since the beginning of the year, while Meta Platforms and Tesla shares have more than doubled. Meanwhile, Amazon and Google shares have risen roughly 50%, with Apple and Microsoft up more than a third.
This performance contrasts with last year's bear market when tech stocks led the declines. However, thanks to consistent earnings growth and the artificial intelligence revolution, tech stocks have become some of the market's biggest gainers this year, despite soaring interest rates.
Goldman Sachs analysts noted in their research note that the divergence between falling valuations and improving fundamentals represents an opportunity for investors. They anticipate an additional boost for these tech giants during the Q3 earnings period, as profit upgrades are expected to outnumber downgrades.
Despite this optimistic outlook, not all analysts share Goldman Sachs' bullish stance. RBC Capital expects weakness in US stocks to continue, citing data from the AAII Investor Sentiment Survey, which showed a steep drop in net bullishness since mid-August.
Nonetheless, Goldman Sachs remains confident about the prospects of the US stock market. The firm now expects the S&P 500 to end 2023 at around 4,500 points, implying a potential upside of approximately 5% compared to current levels. This optimistic forecast is partly driven by expectations of falling Treasury yields, which could provide a boost to these mega-cap tech stocks.
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