​​Still the Magnificent 7? The outlook for big tech after recent volatility

​​​Tech stocks see huge volatility in market rout

​The past week has seen the selloff in the Magnificent Seven technology stocks gather pace. All seven of these major names, Apple, Amazon, Microsoft, Tesla, Meta, Alphabet and NVIDIA, have now seen their stock prices fall into negative territory compared to their position on 1 July:

​1 July to date chart

​However, as the second chart shows, only Tesla is in negative territory for the year. The others have still seen their share prices rise since 1 January, with an average return of 34% for the other six. This is skewed by NVIDA, which has still more than doubled in value, even after falling almost 30% from its record high.

​YTD chart

​How do their valuations compare?

​As a group, these stocks tend to trade at high valuations, usually at double-digit multiples, and sometimes higher. The table below shows the price-to-earnings ratio (PE) ratios for these seven stocks on 16 July, as the recent selloff began, and the ratio on 8 August, as markets calmed:

​PE ratios table

​Looking at the group, we can see that the Magnificent 7 traded at an average valuation on 16 July that was 13.6% above the five-year average. The most extreme was Tesla, which was 44% above its five-year average, while Amazon was a remarkable 26% below its average.

​By 8 August, the declines in their stock prices had driven these valuations down, so that the group now traded at a 2.2% discount to the five-year average. While hardly cheap, this had at least helped to trim some of the excessive investor enthusiasm around these names. At the extremes, Tesla was still almost 30% above its average, while Amazon’s valuation had slumped to a discount of 45%.

​What does this mean for the outlook for the Magnificent 7?

​It is unlikely that we have seen the end of the general period of volatility in stock markets. While the volatility index (VIX) has fallen sharply from the 5 August peak, it remains elevated compared to its mid-July levels. August and September are traditionally weak periods for stock markets, and investors remain nervous about a further unwinding of the yen carry trade, which might precipitate additional volatility.

​But, compared to mid-July, the Magnificent 7 are no longer pricing in overly optimistic assumptions. These remain global giants, with strong demand for their products and strong cashflow levels. As high-growth stocks, they are unlikely to trade at low valuations, except in times of crisis, but for those investors who felt they had missed out on the sector’s excellent performance so far this year, the recent correction might offer a chance to look anew at the sector at more reasonable valuations.