Rudi’s View: Mag7 Dominance & Profit Warnings

Rudi's View | May 01 2025

In today's update:

-All roads lead to the Mag7
-Australia, The Global Safe Haven (?)
-Preparing For Profit Warnings

By Rudi Filapek-Vandyck, Editor

All Roads Lead To The Mag7

Earlier today, JP Morgan rolled out Kerry Craig, Global Market Strategist, and Helge Skibeli, Portfolio Manager, International Equity Group, for a media presentation on general views on financial markets and the outlook for the remainder of the year.

One conclusion communicated is Q1 volatility and the commensurate shifts in asset re-allocations have pretty much placed most key assets on an even keel, when viewed from purely a valuation perspective.

The implication is European equities are now as attractive/non-attractive as their US peers, but so is the relative balance between global cyclicals, growth stocks and defensives.

All that was richly valued has been de-rated and those assets previously lagging and cheaply priced have largely closed the gap. In fact, JP Morgan thinks your typical defensives and robust safe havens might now be the ones that are richly valued. A decision has been made to shift some exposure into Quality Cyclicals instead.

Another stand-out conclusion is in the modern era all roads start and end with the Magnificent Seven in the USA, i.e. Alphabet (Google's parent company), Amazon, Apple, Meta Platforms (formerly Facebook), Microsoft, Nvidia, and Tesla.

JP Morgan's in-house conviction remains these mega-giants are truly a class above most ordinary businesses, with AI set to further cement their global dominance, moats and corporate exceptionalism through further cash flow, profit and margin increases.

So dominant has this select group of global leaders become, most questions asked about US equities, including valuation, outlook and direction, can simply be related back to the 'Mag7'.

One way of approaching today's investor dilemmas is thus by separating these seven from the rest of corporate America, but investors be warned: such an approach only further highlights the corporate exceptionalism on display.

It is JP Morgan's view the US economy awaits a significant impact from tariffs and policy-induced uncertainty, which implies current margin and profit forecasts are plausibly too optimistic. Not for the Mag7, mind you, but for corporate America excluding Amazon and Apple & Co.

There's a valid argument to be made valuations for these exceptional enterprises had become too exuberant by year-end 2024, with JP Morgan's analysis in agreement, but now share prices have come down by -20%-30% and more, and guess where earnings certainty and ongoing margin increase potential are mostly located?

The one caveat behind this thesis is that substantial investments in AI must start generating a positive return, which both JP Morgan and the business leaders at the helm of these technology giants believe will materialise.

Certainly, positive surprises delivered by Microsoft and Meta in the current quarterly results season suggest such optimism seems warranted.

With EBIT margins projected to rise to nearly 32% by FY27 from an average 27% for the Mag7 this year (on JP Morgan's AI positive forecasts), and with the rest of the market facing downgrades to forecasts, it's hard to see the investment world diversifying into other destinations, unless the AI narrative well and truly comes unstuck.

In the same vein, all questions about market valuation, profit forecasts, the equity risk premium, AI and other megatrends, index concentration, US exceptionalism and the multi-year outlook are best answered through separating the Mag7 from the rest.

Including the seven extraordinary megacaps, JP Morgan believes global equity valuations have now fallen to below the 20 year average, implying it's a good time to be on board. While European indices do still look undervalued at an index level, JP Morgan's deeper dive analysis suggests this is merely a function of different index compositions.

Instead, one market segment that looks extremely undervalued today is the semiconductor sector. But average valuations post sell-offs for global megatech companies also suggest these shares are now back into attractive territory.

When pressed about specific companies, Skibeli nominated Amazon and Meta as personal favourites, while Google (Alphabet) is seen facing a near insurmountable headwind through ChatGPT and similar AI tools threatening Google's extreme internet search dominance.

JP Morgan's conviction in the AI investment thesis is music to the ears of the team here at FNArena. As also explained in Monday's Weekly Insights, share prices of ASX-listed AI-beneficiaries such as Goodman Group ((GMG)) and NextDC ((NXT)) tend to follow the lead of de-ratings and re-ratings on Wall Street.