Zhitong
2023.11.30 07:19
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The wave of technology stocks is far from over. The "Big Seven" are expected to continue leading the US stock market next year.

Technology stocks had a strong start in the fourth quarter, thanks to investors' optimistic sentiment about the Federal Reserve's upcoming end to the interest rate hike cycle. Among them, the performance of the "Big Seven" exceeded expectations.

Zhitong App noticed that technology stocks had a strong start in the fourth quarter, thanks to investors' optimistic sentiment about the Federal Reserve's upcoming end to the rate hike cycle, as well as better-than-expected quarterly performance from the "Big Seven" consisting of Alphabet-C, Amazon (AMZN.US), Apple (AAPL.US), Meta Platform (META.US), Microsoft (MSFT.US), NVIDIA (NVDA.US), and Tesla (TSLA.US).

As of Tuesday's close, the S&P 500 index has risen 19% year-to-date, just 1.2% away from its 52-week high. The index has gained about 10% in just two weeks due to the latest CPI report showing that inflation is under control. Although the inflation rate has not yet reached the Federal Reserve's target of 2%, the latest report provides strong evidence for no further rate hikes. As recent market performance shows, investors believe that the Federal Reserve has already ended the rate hike cycle.

Furthermore, investors believe that a rate cut is possible at some point in the first quarter of next year. From then on, it is not difficult to imagine three more rate cuts by the end of 2024, which confirms the long-awaited shift in Federal Reserve policy. Considering this, technology stocks, especially the "Big Seven," are likely to continue delivering strong returns for the rest of this year and the first quarter of next year.

Investors often hear bearish views on technology stocks and their valuations. However, what is often overlooked in the bearish views that usually focus only on stock prices is that their profits are also growing. More importantly, these companies in the "Big Seven" are enjoying the tailwinds of growth that are still in the early stages. For Microsoft and NVIDIA, they are leading in artificial intelligence (AI) technology.

BI estimates that the profit potential of AI is astonishing, with the current growth rate of the AI market at 42%, potentially reaching $13 trillion by 2032. Nevertheless, a US technology report released by Morgan Stanley on Monday shows that Microsoft is still considered to have the lowest ownership percentage among large-cap technology stocks this quarter.

Among the largest technology companies they cover, Morgan Stanley tracks institutional ownership data to assess the breadth of ownership of these companies, "based on the average weight of each company in the top 100 actively managed portfolios relative to the same company's weight in the S&P 500 index." Microsoft is considered the least fully owned company, despite its stock price reaching an all-time high.

In addition to Microsoft, Morgan Stanley also lists Apple, NVIDIA, Amazon, and Alphabet-C as undervalued stocks. As for Apple, it continues to expand its installed base every quarter and will benefit from strong global iPhone demand. Earlier this year, Apple just released the iPhone 15 and launched a mixed reality headset, preparing to create new quarterly installation records in several emerging markets.

Google and Meta Platform will not only benefit from their own AI initiatives but also from the rebound in digital advertising. Although some investors are cautious about holding these stocks due to market trends and contrarian views, their track records speak for themselves.Their investments in high-growth technologies, substantial cash reserves, strong cash flow, and powerful leadership have propelled them to outperform the S&P 500 index in the last quarter of this year, providing momentum for the technology sector.

Therefore, it is expected that by the end of 2023, the technology sector will drive the S&P 500 index to reach new historical highs, as the Federal Reserve concludes its rate hike activities and transitions to rate cuts at some point in the first quarter, and this momentum will continue.