This article first appeared in Capital, The Edge Malaysia Weekly on December 25, 2023 - December 31, 2023

THE era of Big Tech, during which the world’s largest technology companies experienced spectacular growth, is likely far from over, judging by their performance this year.

Collectively, the market capitalisation of the seven most valuable US technology companies — Apple, Microsoft, Amazon, Alphabet (parent of Google), Meta, Tesla and Nvidia, also known as the “Magnificent Seven” or M7 — is up US$5.11 trillion (RM23.7 trillion) this year, with their average total return reaching 111% as at Dec 19, 2023.

Indeed, these Big Tech companies have regained lost ground following the tech stock rout in 2022, which saw US$4.86 trillion wiped off of the value of the M7 counters. “The Great Tech Rout” marked one of the most significant declines for tech companies since the dotcom bubble burst in 1999/2000. Nevertheless, the rout helped to bring the valuations of tech companies to more reasonable levels since their peak in November 2021, as investors feared a possible recession in the US and the eurozone amid high interest rates signalling the end of ample liquidity.

This year’s Big Tech rally is led by Nvidia, whose share price has soared 243% so far, fuelled by the growing demand for artificial intelligence (AI) technology. Meta, the company behind Facebook, has seen its stock jump 186% year to date (YTD).

Tesla’s share price performance has been notable as well, achieving a 105% return during the period, while Amazon’s followed closely with an 83% return YTD. The share prices of Microsoft, Apple and Alphabet also saw significant gains, registering a total return of more than 50% (see table).

The surge in the M7’s market value can be attributed primarily to the growing demand for generative AI technologies, as well as the need for advanced chipsets and data centres to support AI operations.

Today, generative AI such as OpenAI’s ChatGPT — which has become widely known and used globally since early 2023 — is reportedly run on thousands of Nvidia chips that are essential for powering AI-driven applications. This scenario underscores a structural growth story for the tech industry, propelled by the rising prominence of AI, which has boosted the prices of tech stocks.

Meanwhile, as the US Federal Reserve raised interest rates to above 5% this year, global investors who hold significant positions in the strong US dollar but are faced with limited investment opportunities have been increasingly redirecting their funds to tech stocks again, especially the M7, which are seen as the pillars of today’s global economy.

The M7 stocks have significantly dominated the US stock market indices this year. They made up about a third of the S&P 500’s market capitalisation, the largest portion ever dominated by just seven stocks. This concentration contributed to the S&P 500’s YTD gain of 25% in 2023.

One thing the M7 have in common is that all seven are tech companies and, when compared with the other 493 stocks on the S&P 500, have faster than expected sales growth, higher margins, a greater reinvestment ratio and stronger balance sheets.

Still, given their outsized impact, the dominance of the M7 has raised concerns about sustainability and the overall health of the US stock market. Geoffrey Ng Ching Fung, managing director of fund management at UOB Kay Hian Wealth Advisors, highlights that the phenomenon of the seven largest companies dominating the US stock market index had occurred before in the 1980s and 2000s, but never to such a significant extent as presently.

“If we look at how much contribution to returns the M7 have provided US market investors relative to the S&P 500’s component stocks, never before in the past four decades have so few companies dominated the S&P 500 as they have today. The remaining 493 companies on the S&P 500 generated only mid-single-digit returns on a YTD basis, which meant that most of Corporate America had a lacklustre year,” he tells The Edge.

Similar to the S&P 500, another widely popular index is the Nasdaq-100, which tracks the top 100 tech companies in the US. The Nasdaq-100 has risen 55% YTD and, like the S&P 500, its gains were largely due to the M7 stocks, which constitute about 40% of the index.

While 2023 has been all about the M7 and how they have dominated the US stock market indices, Moomoo Singapore assistant dealing manager Too Juncheong points out that the performance of the M7 and their sustainability remain to be seen in 2024.

“The markets are forward looking and would have priced in the eventual rate cuts by the Fed that are likely to happen in 2024 into the current prices of the M7 stocks. Should the economy stay status quo and no immediate political or external events such as a war occur, the M7 stocks will likely continue to do well with the increasing usage of technology and AI applications,” he says.

Regional marketing tech company Antsomi co-founder and CEO Serm Teck Choon describes the overall performance of the M7 stocks in 2023 as “amazing”.

“The combined market cap of the M7 is close to US$12 trillion, and you can imagine how it drives and dominates the US stock market index at such a size. While generative AI has made 2023 the beginning of the new era of AI boom, the M7 have been involved in related developments, which are likely to support their dominance and sustain their performance, at least for the next three to five years,” he says.

Serm observes that among the M7, the stock that stood out in terms of share price performance is Nvidia, whose chips play a crucial role in the AI era.

“Generative AI has demanded that data centres be equipped with massive computing power, which requires the data centres and cloud service providers to invest in Nvidia’s chips, hence why its revenue and share price surged drastically,” he says.

However, in terms of fundamentals and valuations, the tech company that Serm likes most is Microsoft, whose stock price just broke its record high in November 2023.

“Microsoft is a main investor in OpenAI that started this round of AI boom. Since OpenAI’s launch of ChatGPT on Nov 30, 2022, Microsoft has rolled out many improved and new products that are highly integrated with OpenAI’s GPT technologies,” he says.

“Microsoft’s latest announcement on naming all AI products under the brand name ‘Copilot’ has got a lot of attention for its aggressive push to get its business clients and end-user customers preparing for and embracing the new AI era.”

Billy Toh Kian Hin, head of content and investment lead at ProsperUs, a digital investment service owned by CGS-CIMB Securities (Singapore) Pte Ltd, concurs. “Nvidia’s financial performance in 2023 was particularly noteworthy among the M7, with a remarkable 206% increase in revenue and an impressive net margin exceeding 40%. This success was largely fuelled by its robust data centre business, which includes innovative AI and cloud computing products.”

In terms of fundamentals and stock valuation, Microsoft emerged as a standout, according to Toh. “The market set an average target price of US$413.10 for Microsoft, indicating a potential gain of about 10.4%. Despite this modest projection, the company’s price-earnings ratio of around 36 times makes it an attractive investment, given its resilience, market dominance, diverse business portfolio and growth prospects.”

It is worth noting that Microsoft’s recent earnings report highlighted its increasing market share in the cloud sector, despite Amazon Web Services’ strong leadership position.

In addition, says Toh, Microsoft’s commitment to shareholder value is evident in its consistent dividend payments, with an average dividend growth of 10.2% over the past five years, underlining the company’s financial stability and growth potential.

Moomoo Singapore’s Too acknowledges that Nvidia has undoubtedly stolen the spotlight this year. But from a fundamentals and valuation point of view, his personal preferred pick out of the M7 would be Apple.

“Apple has been consistently the most valuable company, even though Microsoft has been challenging this lately. From Apple’s balance sheet, financials and income statement to the branding of the company, coupled with the lower volatility in its share price [compared with the other six M7 stocks],” he says.

“Apple would be more suitable for investors who share the same sentiments as myself — growth with slightly lower volatility tolerance. Another factor is dividend. Together with Microsoft, both companies have been paying out dividends consistently to shareholders as well.”

Suffice it to say, the M7 companies have their undisputed competitive and technological advantage in their respective industries. Investor positivity that growth areas such as AI and electric vehicles are anticipated to continue to drive business performance for these companies — making the M7 natural “safe havens” for investors — acting to reduce any concern of a potential recession in the US and global economies.

UOB Kay Hian’s Ng says the strength of the US dollar in 2023, which appreciated strongly against most currencies globally, meant that investors of US dollar-denominated assets had no choice but to remain invested in these assets.

“In the US equity market, the M7 were clear winners in attracting the resulting investor liquidity. I believe that 2024 will be a year where the execution to lofty market expectations will be a key litmus test for some of the M7 stocks — in particular, Nvidia and Tesla. Any potential disappointment in quarterly financial results or event-related news flow may result in price volatility to these stocks,” he adds.

Ng notes that some of the M7 stocks such as Microsoft and Meta have shown “incredible innovation and adeptness” at continuing to evolve their business models to address changes in their industries and how their products or services are consumed. However, he believes there will likely be a rotation out of the M7 companies to their less well known competitors to take advantage of the difference in valuation compared with the M7 names.

“The keyword here is to remain diversified. Other ways to remain invested in the M7 may include structured products that aim to lock in returns for the investor looking at the M7 stocks remaining within a prescribed price range or taking a view of profiting if there is a downward1 cycle in any of the M7 stocks,” says Ng.

ProsperUs’ Toh stresses that the progress in AI technologies by Chinese tech giants such as ByteDance Ltd (developer of TikTok), Tencent Holdings Ltd (developer of WeChat) and Alibaba Group Holding Ltd should not be overlooked as their advancements could have substantial implications for global tech trends and market dynamics in the coming year.

While Malaysian investors could opt for alternatives such as the leading semiconductor players in the country, he believes a better strategy may be to explore investments in overseas markets.

“For Malaysian investors, diversification into certain US stocks could be a strategic move. Given that their earnings, property and other assets are predominantly in the ringgit, investing in robust US tech stocks offers a way to hedge against currency and market risks. These tech stocks, known for their strong balance sheets and potential for structural growth, present a valuable opportunity,” says Toh.

For a more resilient and diversified portfolio, he suggests that Malaysian investors consider established US brands such as The Coca-Cola Co and Bank of America Corp. Another alternative investment is Invesco QQQ Trust, a tech-focused exchange-traded fund (ETF) that tracks the Nasdaq-100, which comprises the 100 largest non-financial companies on the Nasdaq.

“While not exclusively a tech ETF, it has a substantial allocation to the tech sector, offering a more balanced exposure and potentially reducing susceptibility to external market shocks,” he says.

Moomoo Singapore’s Too says 2024 is a year of elections, during which more than 40 countries will head to the polls.

“The most notable election that may directly impact the M7 is, of course, the US presidential election and to a certain extent the Taiwan presidential election. Politics aside, these two elections will certainly impact the markets either positively or negatively, depending on who eventually takes the top office,” he adds.

Like Toh, Too says investors looking to invest in the M7 could look at ETFs instead of purchasing the seven stocks individually.

“Depending on one’s outlook for 2024, investors may also look at defensive stocks in preparation for a possible recession. Defensive stocks tend to perform better than others in times of distress and recession,” he adds.

An alternative investment that may suit some investors would be income and dividend stocks. With the likely interest rate cuts by the Fed in 2024, income investors can look at income-paying stocks and funds and increase their portfolio allocation accordingly, says Too.

He cautions that the M7 stocks may not always be at the top in the long run. “If history suggests anything, the top companies at any one point in time may not necessarily always be at the top. For instance, the US Nifty Fifty was once the informal name of the top 50 large-cap stocks in the US that propelled the bull market in the 1970s. Many of these 50 companies are still around today, however, none of them are sitting at the top of the league.”

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