The familiar Mag 7 is back again?

After the sharp decline in July and August, is the familiar Mag 7 back?

Currently, US tech stocks are regaining momentum, with investors showing renewed enthusiasm for the technology giants known as the Mag 7. Last Friday, the S&P 500 hit a new all-time high, with tech stocks leading the gains.

The performance of Mag 7 stocks has been outstanding recently, with related ETFs rising by 1.7% this week and surging by about 12% over the past three weeks. Looking at the performance of the Roundhill Mag7 ETF, the recent uptrend of Mag 7 is almost erasing the previous months' declines.

Regarding the recent rise of Mag 7, Barron's commented that we have already passed the (tech stock frenzy) stage. Over the past three months, investors' focus has shifted to the other 493 stocks in the S&P 500 (i.e., small-cap stocks). However, the sustained rise of small-cap stocks requires investors to believe that the significant rate cuts by the Federal Reserve are enough to prevent an economic downturn.

But it seems that the economy has not gone that far yet. Meanwhile, the escalating geopolitical tensions in the Middle East have not helped improve the economy either. In a world full of uncertainties, investing in large companies seems to be a better choice.

The report further points out that the continued attractiveness of Mag 7 may be another evidence of the market's extremely low efficiency, as investors have stopped pricing stocks rationally.

Clifford Asness, a partner at AQR Asset Management, pointed out in a recent paper that from 1950 to the dot-com bubble era (1995 to 2001), the stock market was relatively efficient, a judgment that can be verified by comparing the price-to-book ratios of the most expensive large-cap stocks and the cheapest stocks. This ratio remained relatively stable for about 50 years until the dot-com bubble period, soared, and rose again in the past decade, showing that investors have stopped pricing rationally.

Asness believes that there are three reasons for the current market shift: indexing, long-term low interest rates, and new technologies driving the rise of retail traders, leading to "retail investor cluster stocks" like GameStop far exceeding reasonable valuations. Asness's recommendation is to invest in "value stocks."

With the Fed's rate cuts initiating a global central bank easing cycle, ongoing decline in European inflation, and the People's Bank of China rolling out a series of "policy gifts" to boost the international market, investors are beginning to reassess their portfolios and stock selections. The US tech giants (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, Tesla) continue to be the powerhouse of the US stock market.

Mag 7 experienced a roller-coaster market, Wall Street bullish on US stocks

In the first half of this year, the tech giants of Mag 7 have been seen as the key engine driving the growth of US stocks. By June, Mag 7 contributed to nearly 60% of the S&P 500 index's returns. However, starting from July, this momentum quickly came to a halt.

In July and August of this year, Mag 7 experienced varying degrees of significant declines. Statistics show that from July to early August, the market value of Mag 7 plummeted by nearly an astonishing $2 trillion. In September, the downward trend of Mag 7 stabilized to some extent, entering a phase of overall recovery.

Analysts pointed out that the significant investments of Mag 7 in the field of AI triggered market doubts about its monetization capabilities during the time of the decline. Funds began to flow into small-cap stocks, leading to a shift in market style. Additionally, due to the high market value of Mag 7, the concentration of the US stock market reached a historical high. Deutsche Bank analyst Jim Reid stated that historically high valuations and concentration often accompany subsequent market adjustments.

Even after this decline, the market value of Mag 7 still accounts for over 30% of the S&P 500 index.

However, regarding the future trend of the S&P 500 index, market sentiment leans towards optimism, with Wall Street targeting as high as 6100 points. Some well-known sell-side institutions on Wall Street predict year-end target points for the S&P 500 index ranging from a low of 4200 to a high of 6100.

Furthermore, Goldman Sachs found that from 1996 to 2023, the average daily trading volume of stocks and options peaks in October. As October is the earnings season, listed companies typically manage their year-end performance and provide performance guidance for the following year, making the upcoming weeks an important period for trading activity