Need to Know: Magnificent Seven tech stocks haven’t been this cheap in six years, Goldman Sachs strategists say

by | Oct 2, 2023 | Stock Market

The Federal Reserve may be wrong, but at least officials there won’t be flying blind now that the government will stay open, keeping the nation’s flow of economic data still running. In the early going, there was something of a relief rally, though it quickly evaporated. As the fourth quarter starts, a new note from Goldman Sachs strategy team, led by Cormac Conners, makes the case that the Magnificent Seven stocks are now looking … cheap.

The grouping — Apple
and Meta Platforms
— has seen their next 12 month price-to-earnings ratio fall to 27 from 34. The S&P 493, however, has seen their price-to-earnings ratio fall more narrowly, to 16 from 18.

Put a different way, the largest tech stocks trade on the cheapest valuation relative to the median stock in over six years, the strategists say. The Magnificent Seven trade at 1.3 times their PEG ratio (price-to-EPS-to-long-term growth), versus 1.9 for the median S&P 500 stock. That discount, the strategists say, has been reached only five times in the last decade. As recently as January, they traded on an 18% premium in PEG terms.

So why did the mega-cap techs fall in the first place? One key driver, the strategists say, was the rise in long-term yields. “The underperformance of the largest long duration tech stocks in the face of soaring Treasury yields is consistent with the trading pattern of the last five years: The largest stocks have tended to struggle in the face of greater than 50 bp increases in the nominal 10-year yield over two months,” they say. This time around the 10-year yield rose 62 basis points in two months. Goldman’s own forecast for the 10-year to dip marginally, to 4.3% by the end of the year, and then rise again to 4.6% in the first quarter.

But that’s not the only positive driver for the Magnificent Seven. In the upcoming third-quarter earnings season, the largest tech companies are expected to register 11% sales growth, compared to just 1% for the S&P 500 as a whole. Historically, the megacap tech stocks have beaten so-called preseason sales expectations more than the broader market has, the strategists added.The markets

U.S. stock futures

were flat, after the S&P 500
fell 3.7% last quarter. The yield on the 10-year Treasury
reached 4.64%. Que sera, sera.The buzz The U.S. Congress surprisingly avoided a shutdown, with 45 days of funding at existing levels. The ISM manufacturing report is due at 10 a.m. Eastern, with construction spending also set for release. Fed Chair Jerome Powell is due to speak at a York, Pa. roundtable with Philadelphia Fed President Patrick Harker, according to reports. The Fed’s calendar has Vice Chair for Supervision Michael Barr speaking on monetary policy and financial stability. Sphere Entertainment
shares rose 8% after the successful openi …

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