Market Lab Report / Dr. K's Crypto-Corner
by Dr. Chris Kacher
The Metaversal Evolution Will Not Be Centralized™
Treasury yields are soaring as the Fed cuts rates: The Fed has cut rates by 100 basis points, from 5.50% to 4.50%. Meanwhile, the 10-year Treasury yield has surged by more than 100 basis points since September to a 6-month high amid expectations of a higher for longer rate environment. This comes as inflation is officially back on the rise. Tuesday's ISM Services showed continue expansion but on the heels of higher prices paid, the highest level since last January, underscoring the Fed's expectation of higher inflation ahead. The Fed itself has raised its PCE inflation forecast to 2.5% in 2025, up from 2.1% in September. The central bank now expects the inflation rate to come down to its 2% target in 2027 instead of 2026 as previously projected. CME FedWatch now projects just one rate cut by the end of this year. This of course could reduce to zero cuts or even a projected rate hike should the rate of inflation start to materially rise again.
All the stealth QE due to record levels of interest governments must pay on their debt burdens among other major obligations such as unfunded liabilities such as pensions is pushing inflation higher. Countering this is the material increase in productivity due to AI which can help the US grow its way out of its debt. It will a a tug-o-war between inflation which will impact interest rate direction thus global liquidity vs. AI-boosted productivity which will boost GDP. Buckle up for a volatile 2025.
The Magnificent 7
Leading tech-centric indices such as the NASDAQ Composite and S&P 500 higher are the main beneficiaries of AI technology known as the Magnificent 7: Meta, Alphabet, Tesla, Nvidia, Apple, Amazon, Microsoft. The weighting of these stocks as a percentage of the S&P 500 has increased from 20% at the start of 2023 to a 33% weighting today. These stocks will once again determine what sort of year the S&P 500 has despite the lagging Dow Jones Industrials, the Russell 2000 small caps, and the broadly based NYSE Composite.
On a return basis, the S&P 500 is coming off back-to-back strong years of 24.2% and 23.3% gains, respectively. But the index would have barely registered a gain without the Magnificent 7 at 4.1% and 6.3%, respectively.
As for whether they are overvalued, history shows that overvalued leading names often become even more overvalued, especially during bull markets.
Key observations
1. Five out of the seven stocks (Microsoft, Alphabet, Tesla, Nvidia, and Meta) are considered overvalued based on their P/E and P/S ratios compared to industry averages.
2. Apple and Amazon are the only two stocks in the group considered not overvalued according to the provided data.
3. Tesla has the highest P/E ratio at 100.71, significantly above its industry average of 7.47.
4. Nvidia has the highest P/S ratio at 30.75, well above its industry average of 4.99.
5. Despite being considered overvalued, these stocks have shown strong performance, with the group gaining 63% in 2024.
Market Performance and Future Outlook
- The Magnificent 7 accounted for more than half of the S&P 500's 25% return in 2024.
- Nvidia was the standout performer, contributing more than 20% to the S&P 500's return.
- Analysts expect the group's share of S&P 500 earnings growth to contract to 33% in 2025, down from 75% in 2024.
- Goldman Sachs forecasts the Magnificent 7 will outperform the rest of the S&P 500 by 7 percentage points in 2025, the narrowest margin in seven years. So that's a bit concerning that even GS which talks its book cant put lipstick on this potential pig.
While these stocks may be considered overvalued based on traditional metrics, their strong market positions, growth potential, and dominance in emerging technologies like AI continue to drive investor interest. However, investors should be cautious about the high valuations and potential market concentration risks associated with these stocks especially should the inflation rate continue to rise.
Citations:
[1] https://www.investopedia.com/magnificent-seven-stocks-8402262
[2] https://www.statista.com/chart/33722/stock-market-performance-of-the-magnificent-seven-tech-companies/
[3] https://www.investopedia.com/what-to-expect-from-the-magnificent-seven-in-2025-nvidia-apple-microsoft-tesla-google-amazon-meta-8765203
[4] https://www.morningstar.co.uk/uk/news/258948/newly-undervalued-stocks.aspx
[5] https://www.investors.com/research/magnificent-seven-stocks-january-2025/
[6] https://www.investors.com/research/best-stocks-sp500-sp400-sp600-magnificent-earnings-growth-january-2025/
[7] https://uk.finance.yahoo.com/news/high-growth-tech-stocks-watch-070439763.html
[8] https://cryptorank.io/news/feed/2e5e0-which-magnificent-7-stock-will-dominate-the-market-in-2025
[9] https://finance.yahoo.com/news/exploring-high-growth-tech-stocks-030612618.html
[10] https://finance.yahoo.com/news/apple-regains-3-trillion-market-181642530.html?_guc_consent_skip=1717653495
[11] https://fullratio.com/stocks/nasdaq-aapl/pe-ratio
[12] https://www.macrotrends.net/stocks/charts/AAPL/apple/price-sales
[13] https://worldperatio.com/sector/sp-500-information-technology/
[14] https://simplywall.st/markets/us/tech
[15] https://stockanalysis.com/stocks/msft/market-cap/
[16] https://www.mexem.com/blog/microsoft-2023-strong-financials-and-market-optimism
[17] https://www.macrotrends.net/stocks/charts/MSFT/microsoft/price-sales
[18] https://fullratio.com/stocks/nasdaq-msft/pe-ratio
[19] https://fullratio.com/pe-ratio-by-industry
[20] https://www.oberlo.com/statistics/amazon-market-cap
[21] https://www.macrotrends.net/stocks/charts/AMZN/amazon/pe-ratio
[22] https://www.macrotrends.net/stocks/charts/AMZN/amazon/price-sales
[23] https://stockanalysis.com/stocks/industry/internet-retail/
[24] https://simplywall.st/markets/us/consumer-discretionary/online-retail-ecommerce
[25] https://stockanalysis.com/stocks/googl/market-cap/
[26] https://eulerpool.com/en/stock/Alphabet-Stock-US02079K3059/PE
[27] https://www.financecharts.com/stocks/GOOGL/value/ps-ratio
[28] https://stockanalysis.com/stocks/industry/internet-content-and-information/
[29] https://fullratio.com/ps-ratio-by-industry
[30] https://stockanalysis.com/stocks/tsla/market-cap/
[31] https://fullratio.com/stocks/nasdaq-tsla/pe-ratio
[32] https://csimarket.com/stocks/single_company_valuation_ttm.php?code=TSLA
[33] https://www.macrotrends.net/stocks/charts/GPI/group-1-automotive/price-sales
[34] https://stockanalysis.com/stocks/nvda/market-cap/
[35] https://www.macrotrends.net/stocks/charts/NVDA/nvidia/pe-ratio
[36] https://www.gurufocus.com/term/ps-ratio/NVDA
[37] https://microcap.co/semiconductor-industry-pe-ratio/
[38] https://www.doofinder.com/en/statistics/meta-market-cap
[39] https://fullratio.com/stocks/nasdaq-meta/pe-ratio
[40] https://mlq.ai/stocks/META/metrics/price-to-sales-ratio/