A rotation out of the Magnificent Seven tech stocks may be afoot. But staying away may be easier said than done for many investors. Take Mag 7 member Amazon . The e-commerce and cloud giant is expected to exceed Wall Street’s profit margin expectations in 2024 due, in part, to contributions from its Prime Video service, according to a note Wednesday from Bank of America. On Jan. 29, subscribers will need to pay an additional $2.99 a month to keep watching without ads. This positive outlook is an example of “how it’s so hard to be able to say, ‘You know what, I’m done with the Magnificent Seven,'” Jim said Wednesday, referring to the group of large-cap tech stocks that soared in 2023. Jim expects many customers will pay a few extra bucks to avoid a few minutes of ads interrupting Prime Video shows such as “Reacher,” a popular scripted action series based on the Lee Child’s book series. “For $2.99, I’m happy to be commercial free, so what’s going to happen is that’s pure margin expansion,” Jim said. After cost cuts in 2023 helped Amazon’s profit margin approach record levels , additional steps forward in the new year will likely catch investor attention. In addition to Amazon, the Magnificent Seven includes Google parent Alphabet , Apple , Instagram owner Meta Platforms , Microsoft , Nvidia and Tesla . Nvidia outpaced the cohort in 2023, more than tripling in value amid a wave of investment in its leading artificial intelligence chips. Apple, the relative laggard of the Magnificent Seven, rose nearly 50% in 2023, doubling the S & P 500’s gain. A CNBC index tracking the stocks on Wednesday is headed for its fourth straight day of declines, stretching back to the final two sessions of 2023. .MAG7 1M mountain The CNBC Magnificent Seven index over the past month. On Tuesday, we trimmed our position in all six of the Magnificent Seven stocks we own — a disciplined decision to ensure profits were not squandered and our portfolio of 33 stocks didn’t become too heavily weighted on a small basket of firms. Jim’s Charitable Trust, the portfolio we use for the Club, doesn’t hold Tesla. The sales do not represent a wholesale change in outlook for the tech giants. But we do expect cyclical pockets of the market — such as industrials — to come back in favor if the Federal Reserve rate cuts later this year, which would end a central bank tightening cycle that began in March 2022. “It’s OK to find something that’s cheaper” than one of the Magnificent Seven stocks, Jim acknowledged. However, he said, investors may find that quitting the tech darlings all together is a difficult task. He offered a hypothetical about dumping Amazon in favor of a consumer staple such as General Mills , which owns natural pet food maker Blue Buffalo in addition to well-known human brands like Betty Crocker and Cheerio. “You get rid of Amazon, and you switch to General Mills. General Mills reports and people say, ‘Oh you know, Blue Buffalo, I don’t know. There’s competitive dog food,'” Jim said. “There is no competitive dog food to Amazon.” Elsewhere on Wall Street, analysts at D.A. Davidson said despite their more muted near-term outlook on Apple, they see the iPhone maker as well-positioned to leverage its customer data to develop generative AI applications and experiences. That could be the kind of innovation needed to spark a new growth cycle, the analysts argued. While this may take time to play out the firm’s discussion of the company’s AI opportunity speaks to why Apple is still a stock to own for the long haul. In the near term, the Magnificent Seven may see additional weakness, Jim said. “To replace it with something else, you better have good industrials … that do better if we get the rate cuts, or else what’s going to happen is you’re going to go back to [the Magnificent Seven] after they’ve come down.” (Jim Cramer’s Charitable Trust is long AMZN, AAPL, GOOGL, META, MSFT and NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A rotation out of the Magnificent Seven tech stocks may be afoot. But staying away may be easier said than done for many investors.
Read the full article here