America’s big tech bulls are on a rampage again

The rising US stock market was the unexpected blockbuster of 2023.

The so-called Magnificent Seven of technology stocks – Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia and Tesla – were the leading players in the rise in the indices.

The tech-heavy Nasdaq 100 is up 37 percent since January, while the S&P 500 is up 20 percent.

You may not have any direct interests in the Magnificent Seven, but you are unlikely to be just a spectator of this action.

Many popular funds, such as F&C and Fundsmith, have significant holdings in these titans.

This suggests that you need to ask yourself if you want to stick around for more fun, or position yourself for a shift in sentiment. After all, the Nasdaq trades at about 25 times its constituents’ estimated earnings. The ten-year average is around 21.

Some experts predict further gains, despite the turmoil caused by the Fitch Ratings’ downgrade of the US government debt this week.

John Stoltzfus, of Oppenheimer Asset Management, predicts the S&P could rise another 7 percent to 4,900 by Christmas.

Even Morgan Stanley’s Michael Wilson — an arch pessimist of Wall Street — sees another upside, suggesting there could be a repeat of 2019, when the S&P 500 gained 30 percent.

Behind this optimism lies the belief that interest rate hikes will slow down, and excitement about the practical applications of generative AI (artificial intelligence).

It may be tempting to join the party now, betting that the Magnificent Seven will progress further, assuming that we will become even more dependent on their products and services in every aspect of our existence.

Ian Mortimer and Matthew Page, managers of the Guinness Global Innovators Fund argue that these “high value” companies enjoy certain advantages that should ensure their long-term growth.

Rising: Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia and Tesla were the leading players in the rise in indices

“They have strong free cash flow that helps them invest in growth and innovation,” they said. “But they also benefit from high barriers to entry that protect their market share.”

In light of these characteristics, it seems prudent to continue holding Magnificent Seven shares.

But buying at these levels carries significant risk as more focus begins to be placed on the valuation of stocks that are central to the industrial AI revolution.

Jon Guinness, portfolio manager at Fidelity International, cites Nvidia, which makes the microchips for Chat GPT, the generative AI program.

Stuart Gray, of Alliance Trust, says: ‘We have significant positions in Alphabet, Amazon and Microsoft. But all of these are based on an analysis of their outlook rather than a collective view of the entire industry’s potential profitability. History shows that sentiment-driven rallies in favor of one sector can easily end in defeat, so it’s wise not to put all your eggs in the tech basket.”

He suggests looking for ‘better, cheaper options’.

Fund Caliber’s Darius McDermott says, “I have no doubt that AI will change the world and is a viable long-term theme.

“But short-term caution is prudent.”

Fidelity’s Guinness argues that some of these opportunities lie in technology areas that are currently out of the limelight, such as personal computers, smartphones and “memory,” the storage of data on a computer.

“All three areas have been very weak for at least 12 months — smartphones have been weak for three months,” he says.

“All three have cleared excess product stock and so sales will begin to recover. AI requires a lot of powerful memory that sells at a much higher price than normal memory.

“Micron, a memory specialist, may be lagging behind in AI memory, but he will catch up. For mobile, Qualcomm, Skyworks Solutions or Qorvo will benefit if demand recovers, especially in China. For PCs, Intel or Advanced Micro Devices (AMD) will benefit from standardization. They may even lag behind AI beneficiaries over time.”

A cost-conscious route to AMD and a mix of Magnificent Seven and more obscure names can be found in investment funds Allianz Technology and Polar Capital Technology, whose stock prices are 13.2 percent and 13.99 percent off net worth, respectively.

You may be wondering what about the smaller US companies in other fields that have been overlooked in the AI ​​obsession of 2023.

McDermott suggests T. Rowe Price US smaller companies, Schroder US mid-cap and Artemis US smaller companies.

The Artemis fund invests in snack manufacturer Hostess Brands. The specialties include the Twinkie sponge cake, launched in 1931, and the kind of comfort food that many Americans will likely enjoy, wondering how AI will change their lives for years to come.