RBC says a 'crowded' rally in Magnificent 7 is 'in need of a pause'

© Reuters.

(Updated – December 12, 2023 8:41 AM EST)

RBC Capital Markets strategists suggest that the mega-cap growth trade is currently overvalued, crowded, and could benefit from a pause.

Analysts note that the rate of upward earnings-per-share estimate revisions is no longer strongly favoring the top 10 names compared to the broader market, as observed in the first half of 2023.

The performance of the top 10 names in the relative to the rest of the stock market has plateaued near levels observed at highs since 2008. These top 10 names also exhibit a median price-to-earnings ratio close to post-Covid highs, reaching the highest level relative to the rest of the stock market since the tech bubble.

“We find that spikes in concentration tend to be associated with nervousness around a major crisis – sometimes before it happens, sometimes in the middle of the event, and sometimes after the event,” analysts said.

The strategists suggest that the growth prospects for the rest of the U.S. stock market could improve if broader economic forecasts in the U.S. increase, potentially narrowing the gap between the top 10 names and the broader market.

“Our work suggests that rising rates were less of a problem for the top names to begin with, and we think it’s logical they could be a source of funding as investors move into areas in which higher rates were seen as more of a problem.”

The equity strategists previously set a 5,000 price target on the S&P 500 for the end of 2024. They said back then that equity valuations can stay higher than many investors realize.

The Magnificent Seven stocks include Apple Inc. (AAPL), Microsoft (MSFT), Inc. (AMZN), Alphabet Inc. (GOOGL), Nvidia (NVDA), Meta Platforms (META), and Tesla (TSLA).