The market truth that overturns cognition: the steep yield curve is indeed a "exclusive benefit" for the seven giants of the US stock market

According to the Zhitong Finance APP, 22V Research, a top investment institution on Wall Street, stated that the steepening of the overall yield curve of U.S. Treasuries across various maturities is a strong tailwind for the "Magnificent Seven" (also known as the seven giants of U.S. stocks) in the U.S. stock market. However, the institution noted that if the steepening of the U.S. Treasury yield curve significantly slows down or shifts from steep to flat, the performance of the seven giants and other large tech stocks will also face downward adjustments.

Therefore, from the perspective of the strategist team at 22V Research, a shift in the U.S. Treasury yield curve from its recent stagnation or flattening to a steep upward slope may indicate that the "Magnificent Seven," which account for a high weight (30%-40%) in the S&P 500 and Nasdaq 100 indices, will embark on a new upward momentum.

From a month-over-month benchmark perspective, the change in the overall U.S. Treasury yield, including yields of various maturities, is at the 94th percentile of all monthly changes in history. Among them, the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," has risen to 4.56%, with a change of up to 66 basis points so far this year.

In addition, investors generally expect that the Federal Reserve's rate cuts in 2025 will be significantly reduced from the previous expectation of four cuts to 1-2 cuts, and the nominal yield across the entire U.S. Treasury yield curve has risen sharply since November; if the yield curve inversion ends in 2024, it means that U.S. Treasury investors are generally pricing in that inflation will be controlled under the Federal Reserve's long-term maintenance of high interest rates, and that the U.S. economy will not experience a deep recession. According to 22V Research, these are all positive catalysts for the "Magnificent Seven."

It is understood that Dennis Debusschere, President and Chief Market Strategist of 22V Research, stated in a portfolio strategy report that although the potential of large-cap stocks led by the "Magnificent Seven" currently supports the entire U.S. stock market, the "Magnificent Seven" is gradually weakening from a technical stock sell-off point near "extremely overbought levels."

The latest views from 22V Research are disruptive to investor perceptions. According to the valuation system of finance, the steepening of the U.S. Treasury yield curve is undoubtedly a significant negative catalyst for the valuation of the entire stock market. However, 22V Research believes that the trend of steepening is the core catalyst for the "Magnificent Seven" to initiate a strong upward trend in stock prices.

When will the U.S. stock market's seven giants rise again? The answer may lie in the "U.S. Treasury yield curve."

The steepening of the U.S. Treasury yield curve (i.e., long-term interest rates rising faster than short-term rates) is typically seen as a signal of enhanced economic growth and corporate profit expectations. While rising long-term rates can increase corporate financing costs, 22V Research stated in its report that for the highly profitable and cash-rich "Magnificent Seven," it represents a different logic From the perspective of the DCF valuation model, the valuation of technology companies is typically based on the discounting of future cash flows. A steepening yield curve implies rising long-term interest rates, which may lead to an increase in the discount rate, thereby putting significant pressure on the valuations of growth companies, especially small and mid-cap growth companies. However, if the market expects strong economic growth, driving the U.S. Treasury yield curve to steepen, the robust profitability of the "Magnificent Seven" tech giants, along with their abundant cash flow and increasing stock buyback scale, can still support their high valuations, attracting global capital from other stock markets and sectors to flow into the "Magnificent Seven."

This logic also explains why the Federal Reserve's interest rate cut expectations were fluctuating and occasionally saw a significant retreat from 2023 to the first half of 2024. The trend of U.S. economic growth is not strong, but it is not overly weak to fall into a recession. Since 2023, the "Magnificent Seven" have outperformed U.S. value large-cap stocks and a wide range of small and mid-cap stocks, cyclical stocks, and all types of stocks, leading the S&P 500 Index and the Nasdaq 100 Index.

Therefore, since 2023, although interest rate cut expectations have repeatedly faced market pressure and U.S. economic growth has significantly slowed, the seven tech giants have become a "safe haven" for global capital in the context of fluctuating interest rate cut expectations and slowing economic growth, thanks to their unparalleled AI revenue scale, solid fundamentals, strong free cash flow reserves, and continuously expanding stock buyback scale.

According to 22V Research, conversely, if the steepening of the yield curve slows down or even flattens, it may indicate that the market's expectations for future U.S. economic growth are weakening, or that expectations for Federal Reserve interest rate cuts are significantly rising. At that time, it could negatively impact the seven tech giants, prompting capital to flow out of the tech giants and into the bond market, defensive stocks, or small and mid-cap stocks that are more sensitive to interest rate expectations.

The "Magnificent Seven" of U.S. stocks refers to Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms, which are the core driving forces behind the S&P 500 Index's record highs. Looking at the entire U.S. stock market, the "Magnificent Seven" have been the core driving force leading the entire U.S. stock market since 2023, attracting global capital due to their strong revenue from AI, solid fundamentals, consistently strong free cash flow reserves over the years, and continuously expanding stock buyback scale.

Another Core Catalyst Driving the Surge of the "Magnificent Seven": Unmatched Profitability

22V Research states that the stock price increase of the "Magnificent Seven" not only relies on the U.S. Treasury yield curve, but the strong earnings per share (EPS) growth in 2025 and 2026 is also crucial for their stock price momentum. However, 22V Research believes that under the strong push of the AI boom and market dominance, the EPS of the "Magnificent Seven" will continue to show strong performance since 2023. Therefore, in terms of short-term stock price momentum, a steepening "U.S. Treasury yield curve" may be a core positive catalyst for the "Magnificent Seven." The team led by Dennis Debusschere, Chief Market Strategist at 22V Research, stated that strong earnings expectations remain a strong support for large-cap stocks such as the seven major tech giants, and their valuations require robust earnings per share growth trends in 2025 and 2026. "If the risk of a U.S. economic recession does not significantly escalate and earnings expectations do not face substantial downside risks, the likelihood of large-scale reductions in large-cap stocks is low."

John Roque, Head of Technical Strategy at 22V Research, noted: "The seven major tech giants have recently experienced two adjustment phases, falling from the upper boundary of their upward-sloping price channel to the lower boundary of that channel, with declines of -13% and -16%, respectively. A similar correction phase now suggests that, according to the current technical pattern, the ETF focusing on the seven major tech giants—Roundhill Magnificent Seven—still has about -12% adjustment potential from last Friday's closing price."

According to statistical data, in terms of expected earnings per share, the seven major tech giants account for approximately 24% of the overall expected EPS of the S&P 500 index and 14.5% of the expected sales of the S&P 500 index over the next 12 months.

"Currently, the overall market's broad conditions are far from recession levels. Even if a recession does not become the baseline scenario, the internalized catalytic factors in the market may further weaken," Debusschere from 22V Research stated. "As yield spreads widen, the curve flattens, and the Financial Conditions Index (FCI) tightens generally, the overall U.S. stock market may continue to decline."

How to Position in the "Seven Major Tech Giants"? Four-word Maxim: Buy on Dips

22V Research indicated that if the "seven major tech giants" overall retract by 13%-16%, coupled with a slowdown or stagnation in the steepening of the U.S. Treasury yield curve, it would be a good opportunity to buy on dips. A finance professor from New York University, known globally for broadening the valuation system of financial markets, stated that these seven giants present an excellent buying opportunity during stock market adjustments, as most of them will continue to achieve strong profit growth trends and their fundamentals are "rock solid."

Aswath Damodaran, a finance professor at NYU Stern School of Business, recently stated in a media interview: "As a long-time value investor, I have never seen profit machines as incredibly lucrative as these large tech companies, whose fundamentals are so strong. Moreover, I believe the growth momentum of these profit machines will not weaken."

"The market will always experience some degree of adjustment. I suggest that when this happens, you should at least find a way to increase your holdings in one of these giants, or perhaps two to three would be even more appropriate, as they largely drive the upward momentum of the U.S. economy and the entire U.S. stock market." "This New York University finance professor added.

Damodaran also stated in an interview that the seven major tech giants, including AI chip leader Nvidia, have 'extremely rich profit margins,' and he remains firmly invested in these seven tech giants.

These tech giants, representing the forefront of human technological power, have dominated the global tech investment boom in recent years and have led the artificial intelligence investment frenzy since 2023. Investors are betting on the fervor of global companies pouring massive amounts of money into generative AI. With tech giants like Nvidia, Apple, and Google holding vast market sizes and strong financial strength, they are in the best position to leverage artificial intelligence to expand their revenue scales.

It is no exaggeration to say that they are the biggest contributors to the long-term bull market in the U.S. stock market. According to the expectations of finance professor Damodaran and major Wall Street firms, these giants may continue to lead the U.S. stock market to new highs by 2025. The Barclays strategy team recently predicted that, driven by strong profit growth trends among large tech giants and the resilience of the U.S. economy, the S&P 500 index will reach new highs next year, hitting 6,600 points. UBS's analysis team stated that the tech sector, where the seven tech giants are located, remains the preferred sector in the U.S. stock market, with expected gains next year likely to exceed the broader U.S. market—the S&P 500 index. UBS predicts that the S&P 500 index could reach 7,000 points by 2025