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

The grouping — Apple
AAPL,
+0.30%,
Microsoft
MSFT,
+0.67%,
Amazon
AMZN,
+0.90%,
Alphabet
GOOGL,
-1.10%,
Nvidia
NVDA,
+0.95%,
Tesla
TSLA,
+1.56%
and Meta Platforms
META,
-1.23%
— 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
ES00,
+0.02%

NQ00,
+0.20%
were flat, after the S&P 500
SPX
fell 3.7% last quarter. The yield on the 10-year Treasury
BX:TMUBMUSD10Y
reached 4.63%. Que sera, sera.

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