Rudi’s View: Mag7 Dominance & Profit Warnings

This story features GOODMAN GROUP, and other companies. For more info SHARE ANALYSIS: GMG

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

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.

Australia, The Global Safe Haven (?)

It’s not something that comes naturally to the Australian share market, outside of a Stronger-for-Longer Commodities Cycle, but international investors parked their safety-seeking funds into Australian banks and the local index while the threat of a global trade war put global assets under extreme pressure.

Now, strategists at UBS have become concerned the local market might be too richly valued in face of the challenges ahead, with underlying fundamentals weakening. UBS sees downgrades to earnings forecasts on the horizon. Usually, this means share prices will come under pressure.

To account for what is yet to occur, UBS has reduced its year-end target for the ASX200 to 8150 from a prior 8850. On Thursday, the index closed at 8145.

All of the above has triggered a number of portfolio adjustments, with UBS recommending investors stay underweight sectors with already poor earnings momentum, including Energy and the banks. In response, Healthcare has been upgraded to a Neutral weighting, with that sector now considered undervalued.

One additional consideration is that UBS analysts believe poor earnings momentum for large cap healthcare companies might be near the point of exhaustion (i.e. a positive momentum switch should be approaching).

Industrials as a sector weighting has been downgraded to Neutral, leaving Insurance and Technology, Media & Telecom (TMT) as the sole overweighted sectors. Small caps as a group are to be underweighted too.

In terms of the broker’s Most Preferred and Least Preferred ASX-listed companies, AUB Brokers ((AUB)), Car Group ((CAR)), Treasury Wine Estates ((TWE)) and Worley ((WOR)) are no longer included as Most Preferred.

Instead that list now consists of:

RESOURCES
-BHP Group ((BHP))
-BlueScope Steel ((BSL))
-Northern Star ((NST))
-Orica ((ORI))
-Origin Energy ((ORG))

FINANCIALS & REITS
-Dexus ((DXS))
-Lifestyle Communities ((LIC))
-Medibank Private ((MPL))
-QBE Insurance ((QBE))
-Steadfast Group ((SDF))

INDUSTRIALS
-Brambles ((BXB))
-Coles Group ((COL))
-Collins Foods ((CKF))
-Light & Wonder ((LNW))
-REA Group ((REA))
-SGH Ltd ((SGH))
-TechnologyOne ((TNE))
-Telstra ((TLS))
-Telix Pharmaceuticals ((TLX))
-Xero ((XRO))
-Life360 ((360))

The selection of Least Preferred no longer includes APA Group ((APA)), JB Hi-Fi ((JBH)) and Sonic Healthcare ((SHL)).

Remain on this list:

-Aurizon Holdings ((AZJ))
-ASX Ltd ((ASX))
-Bank of Queensland ((BOQ))
-CommBank ((CBA))
-IDP Education ((IEL))
-Lovisa Holdings ((LOV))
-Reece ((REH))

Recent fresh inclusions have been Steadfast and SGH to the Most Preferred and Lovisa to the Least Preferred list.

Preparing For Profit Warnings

Historically, and excluding the two key results seasons of February and August, corporate profit downgrades in Australia typically peak in May, report market strategists at Goldman Sachs. They also believe this year’s confession season could well prove above-average bad.

Have been singled out for a likely negative surprise:

-Spark New Zealand ((SPK))
-Orora ((ORA))
-Computershare ((CPU))
-Endeavour Group ((EDV))
-Fletcher Building ((FBU))
-IDP Education ((IEL))
-Healius ((HLS))
-Ramsay Health Care ((RHC))

Though the upcoming season won’t simply be all bad news. Goldman Sachs has equally identified a number of candidates most likely to surprise in a positive sense:

-Xero ((XRO))
-BlueScope Steel ((BSL))
-QBE Insurance ((QBE))
-Codan ((CDA))

Also, when it comes to finding true cheap valuations in a share market that has recovered at the speed of light throughout April, the strategists point towards commodities and small caps (predominantly domestic cyclicals).

****

See also Monday’s Weekly Insights: https://fnarena.com/index.php/2025/04/30/rudis-view-awaiting-the-real-world-ramifications/

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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P.S. II – If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

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