Magnificent 7 face the ultimate test as Q2 earnings loom

Investors have largely shifted their attention away from the Magnificent 7 companies as enthusiasm has moved toward semiconductor stocks and the broader artificial intelligence trade. 

The Roundhill Magnificent 7 ETF (MAGS) has gained just 0.68% this year, significantly underperforming the S&P 500 and Nasdaq 100 indices. 

With earnings from the biggest names in technology approaching, the key question is whether this pullback presents a golden opportunity to buy these market leaders before a potential rebound.

Magnificent 7 stocks have underperformed the market

Magnificent 7 is a group made up of the biggest American companies, including popular names like Apple, Microsoft, Alphabet, Amazon, Meta Platforms, NVIDIA, and Tesla. Cumulatively, these companies are valued at over $22 trillion.

These companies have underperformed the broader market this year as investors have started to question their AI spending. At the same time, investors have turned to memory companies, with the popular DRAM ETF attracting over $20 billion in assets in less than four months.

Apple, which has plans to spend just $14.6 billion in capital expenditure this year, has jumped by 20% and is the best-performing Magnificent 7 company. Nvidia and Google have risen by 9%, while Amazon has risen by 7%. Meta has slipped by 2.8%, while Tesla is down by over 17%.

This performance has pushed investors to lose interest in these companies. The closely-watched Roundhill Magnificent 7 ETF (MAGS) has had over $167 million in outflows in the last six months. It has shed over $332 million in assets in the last three months.

MAGS ETF inflows and outflows | Source: ETF Db

Recently, however, there are signs that investors are buying the dip, with the net inflows rising by $400 million in the last 30 days. 

Magnificent 7 earnings ahead

The next few days will be crucial for Magnificent 7 companies as they publish their financial results. Tesla and Alphabet will be the first ones to publish their results today, with analysts expecting strong numbers.

Tesla recently announced strong second-quarter delivery numbers. It sold 480,000 vehicles in the second quarter after making 450k. A recent report suggested that the company is boosting its production in Germany as demand in Europe jumped. 

Estimates are that its revenue rose by 17.2% in the second quarter to $23 billion as its deliveries jumped.

Alphabet is also expected to release strong numbers. The average estimate is that its revenue jumped by 21% to $113.62 billion, while its EPS moved from $2.31 to $3.04. These will be the first results since the company raised billions of dollars by selling shares and debt. 

More Magnificent 7 companies will publish their numbers next week. Microsoft and Meta Platforms will release their results on Wednesday, while Apple and Amazon will do so a day later. Nvidia is always the last company to publish its numbers.

These results will be important because the big-tech companies will describe their strategies going forward. Most importantly, they will announce their capital expenditure plans as the cost of memory, servers, and chips keeps rising. 

Most analysts believe that most of these companies will do well over time. In a recent Bloomberg interview, Morgan Stanley’s Mike Wilson said that big tech stocks will do well as investors rotate from semiconductor names. 

Also, the average estimate for Nvidia stock is $304, much higher than the current $207. The consensus Microsoft target is $556, up from the current $397, while Google’s target is$386.