"There are great opportunities on the stock market beyond the Magnificent Seven"

This week, investors were watching chip maker Nvidia closely, which released its earnings on Wednesday, comfortably beating already-elevated expectations: the company earned $12,285 billion (11,32 billion euros), six times more than the previous year, while revenue expanded to $22,1 billion (around 20,37 billion euros) in 2023.

Ismael García Puente, head of investments and fund selection at MAPFRE Gestión Patrimonial, explains that the important thing is guidance and whether or not the expected strong growth in profit was met, which in this case was up a whopping 765%.

He also recalled that “we’re not looking at a bubble in the U.S. tech sector”, given that we’re talking about companies that actually make profits, with high margins and almost monopoly market shares.

Even though there is no such bubble, Javier de Berenguer, investment manager and fund selector at MAPFRE Gestión Patrimonial, argues that “we need to be cautious when approaching these types of companies.”

He also believes that there is a base error in the market: consider the so-called Magnificent Seven, up to now considered to be on an equal footing. "Last year, they enjoyed very favorable tailwinds on the back of the AI boom, but we believe that from this year on, the paths their stock prices will take will be quite different, both in direction and magnitude. In the end, this is because the nature of their businesses is different and some of them are oligopolies, but they can’t be treated in the same way," he insisted.

What is clear is that this market concentration in only those seven companies leaves great opportunities outside of them, as is the case in the pharma sector. "Though there is no spotlight on them, there are numerous high-quality companies generating impressive cash flows amid little cyclical sensitivity. We believe they should be included in a diversified portfolio," he explains.

Beyond technology, the market “that until now has been favorable for risk assets seems to have paused, after U.S. inflation data came out, along with other not-so-positive macroeconomic data”, so De Berenguer doesn’t rule out any healthy profit taking in the short term. However, he adds that positive results from Nvidia could bring back this positive market sentiment.

On Wednesday, HSBC also published its results, reporting earnings of $22.43 billion (€20.734 billion) in 2023, up 56%, below the $26.10 billion expected by analysts due to a $3.00 billion writedown in its investment in China’s Bank of Communications.

“Market sentiment is very negative as far as China goes, and that’s what’s affecting the company on the stock exchange,” says García Puente, who added that the bank doesn’t have direct exposure to the real estate sector, which is where the problems start, and that it was the bank’s holding this position that has dragged earnings south.

Hopes of rate cuts fade

The head of investment and fund selection at MGP explained that the investment community has been trying to forecast the number of rate cuts and when they will kick in for a year now. Compared to the five or six expected hikes at the beginning of the year, between two and three are now expected, much more in line with the central scenario.

However, García Puente draws attention to the divergence between U.S. and European analysts. While the former believe that the increases will happen sooner, so as not to coincide with the presidential election, the feeling in Europe is that there won’t be any cuts until the second half of the year.