Maybe this time is different, with artificial intelligence driving unprecedented profit growth. Or maybe investors are a little too impatient, and the seven largest U.S. stocks may need to pause.
With Tesla's (TSLA.O) nine-day winning streak, all seven major U.S. stocks have risen this year, with an average gain of 45%. The gain in the past 10 days is about 11%, about 9 percentage points higher than the 2% gain of the S&P 500.
The Big Seven now account for about 34% of the S&P 500’s market value, the highest level in the past five years. Over the past five years, these stocks have risen about 380%, doubling the market’s return.
The AI frenzy is a big driver of these seven stocks. It has helped push Nvidia’s market value past $3 trillion, adding about $2.1 trillion in the past year alone.
However, just because it's up is not a reason to sell. Things are certainly not going badly for these stocks. Wedbush analyst Dan Ives says the AI revolution is having its "1995 moment." In other words, AI is the beginning of another dot-com era for stocks. The recent gains don't mean the end of the dot-com bubble.
He is bullish on AI and rates Tesla, Microsoft (MSFT.O) and Apple (AAPL.O) as buys. These are three of the Big Seven stocks he covers. Other Wedbush analysts also rate Nvidia (NVDA.O), Meta Platforms (META.O), Alphabet (GOOGL.O) and Amazon (AMZN.O) as buys.
The bullish results are undeniable. These seven stocks have performed exceptionally well. Heading into this week, the Roundhill Magnificent Seven Daily Inverse Active ETF (RMS) hit all-time highs four days in a row. However, all that gain could be the biggest problem facing the Magnificent Seven stocks -- at least for a while.
“Recent gains have sent the Big Seven/S&P 500 relative strength line in a parabolic trajectory,” Frank Cappelleri, founder and market technical analyst at CappThesis, wrote in a Monday note.
He does not make fundamental calls on any of the Big Seven stocks. He uses chart patterns to get a sense of where stocks are headed in the short and medium term. Relative strength is a tool that technical analysts use to determine if there is too much good or bad news in a group of stocks.
In the case of the Big Seven, the market is dealing with good news. Their collective relative strength is near 80. A reading of 50 is average. Readings above 70 typically signal that things can't get any better. Stocks with high relative strength are said to be "overbought."
“It’s interesting that the ETF is doing this right as earnings season is about to kick off,” Cappelleri said. “How good will these seven companies need to do to keep this momentum going?”
That's a good question. Nvidia is a major AI stock. It reports quarterly results in late August. Wall Street expects earnings of 64 cents per share. The company has beaten estimates by 9% to 31% in recent quarters. It will have to repeat that outperformance again for the stock to move higher.
Being overbought doesn’t mean shares have to fall. “At the very least, we expect some covering to happen soon,” Cappelleri added. “Things could be pausing.”
It's hard to pull away from the biggest winners. However, the stock charts suggest that investors might want to start thinking about reducing their exposure to the Big Seven, at least a little bit.
Article forwarded from: Jinshi Data
