00:00 Speaker A
After several years of tech giants getting bigger and bigger market caps and dominating the makeup of the S&P 500, like never before, a different dynamic has emerged this year. The weight of the top 10 stocks in the S&P 500 has recently seen some major weakness relative to the rest of the stock market. Thank you, RBC Capital Markets, Lori Calvasina for this nifty chart you are looking at right now.
00:23 Speaker A
This chart is primarily made up of the Mag 7 tech giants. Sentiment on tech has soured as fears of overspending on AI infrastructure ratchets up. Expect many of the tech companies this week reporting earnings to hike their CapEx plans, believe it or not, much to the dismay of investors. I am most concerned about what Meta will say on this front.
00:43 Speaker A
Investors have rotated out of tech and into more value sectors such as healthcare, energy, industrials with these spending fears swirling. Let’s put it to the old B round table. Um, Art, it’s in one respect, it’s good to see a more rational market, but you look at these seven stocks, you can’t argue their importance, but you also can’t argue that the next series of quarters are going to be huge from top and bottom line perspectives, maybe not for Tesla, but the rest of them.
01:08 Art
Yeah, for sure. And I think one of the things that the the chart highlights is just how much the move has been over the on a three-year stack. So I think it’s important to say, have have these things gotten ahead of themselves? No, they’ve consolidated nicely. Nvidia’s basically where it was when it reported earnings last quarter and and the rest of the group X Alphabet, which has been the top performer, has really moved sideways.
01:28 Art
I think that can be healthy. That consolidation can be very healthy. If we think that we’re in the in the late innings of the artificial intelligence revolution, then perhaps this move is sustainable. But I just think that as we work our way through earnings and the hyperscalers talk about how much more they need to spend to get to that agentic large language model dream. I I think this company re-rates higher.
01:44 Art
And certainly, if you look at the average uh multiple of the Mag 7 and and back out Tesla, you’re trading at 30 times for companies that typically um are growing their earnings between 40 and 60 uh percent and have gross margins that are north of 60 to 70%. So I think that, you know, we’ve created or we’re in the process of creating a group that looks much more attractive as we head into earnings this week.
02:05 Speaker A
And outside of uh the move in precious metals, which has been uh in my view, the story of the year, the second story has been the broadening out of investors. So they’re thinking beyond these 10 large companies, which includes the like of a Berkshire Hathaway and a Broadcom, and dare I say, that’s healthy. Hats off to them that there are 490 other stocks to buy in the S&P 500. Good for them for finding them.
02:27 Anj
Yeah, and this is what strategists have been talking about that this would happen this year that you would see a bit of a broadening out. I mean, you are looking at year to date, energy stocks are the biggest gainers. Uh you’re looking at materials, industrials that are higher as well.
02:44 Anj
You also have the big beautiful bill, tax benefits, tax incentives. and this is also what’s driving some of these more cyclical stocks as well. So they are going to be saving tremendously from this big beautiful bill and all the infrastructure that that they’re also building as well.
02:59 Speaker A
All right, last word to you uh on this front. I know you mentioned uh previously that you like Google. What are your thoughts on on Nvidia here into earnings? I believe they report in mid-February.
03:09 Art
Yeah, so obviously we’re in the earnings Super Bowl right now. The Nvidia’s reports like the earnings pro bowl. It comes after the season and and and and we get to find out just how well they’re doing. This is the cheapest Nvidia’s been for about three years. So when you you’re trading at 25 times forward, which is going to go down after the report because they’re going to raise their guidance, um they’re the tip of the sword for uh artificial intelligence spend. So I just think that uh anything Nvidia is only going to reinvigorate the trade.
03:32 Art
I agree with Anj on the broadening out, which puts us in a much healthier place. But the consolidation in the big 10 certainly sits in a place where they’re getting a whole lot more attractive in real terms.