Has the corporate bond market been flashing a signal to the stock market about the so-called Magnificent Seven grouping of technology stocks?
After holding up during the late summer period when four of that group’s stocks moved into correction territory, the bonds have seen net selling over the last two weeks, led by Apple Inc.
AAPL,
which has the most outstanding debt of the group.
One caveat: Tesla Inc.
TSLA,
has no outstanding bonds. In the past, the electric-car maker issued convertible bonds, but they have all been converted into equity.
The other five companies in the group are Facebook parent Meta Platforms Inc.
META,
Microsoft Corp.
MSFT,
Nvidia Corp.
NVDA,
Amazon.com Inc.
AMZN,
and Google parent Alphabet Inc.
GOOGL,
The seven companies are credited with helping drive the stock market’s gains in the first half of the year, driven by excitement about artificial intelligence.
But with their lofty valuations, they now make up nearly one-third of the S&P 500’s aggregate market value, giving them a disproportionate impact on the overall performance of the index.
Apollo Global Management’s Torsten Slok said the group is showing similarities to the “Nifty 50” names of the early 1970s, that were highfliers early in that decade before shedding more than 40% of their value in the bear market of 1973 and 1974, as MarketWatch’s Joe Adinolfi reported.
See also: The Magnificent Seven could be called the messy seven after a ‘meh’ third quarter
As the following charts from data solutions provider BondCliQ Media Services illustrate, the bonds have seen net selling overall for the last two weeks, with Apple accounting for the bulk of that volume.
Bonds of the Magnificent Seven — Two-week net customer flow. Source: BondCliQ Media Services
The next chart offers a breakdown of selling by customer type. Volume is neck-and-neck between Apple and Amazon, but Apple bonds have seen more net selling. The only one in the group that remains net positive is Meta.
Bonds of the Magnificent Seven — two-week volume by customer type. Source: BondCliQ Media Services
The selling has come as spreads have been tightening. That suggests that some of the selling may have been profit-taking or a move down in quality against a background of strong credit markets.
“You don’t need to buy highly rated Microsoft when you feel good,” said Winnie Cisar, head of global strategy at CreditSights.
Select bonds of the Magnificent Seven — two-week spread movement. Source: BondCliQ Media Services
The following chart shows the group by maturity bucket.
Outstanding bonds of the Magnificent Seven by maturity bucket. Source: BondCliQ Media Services
Stock investors are showing some signs of fatigue with Nvidia, which closed down 2.5% after its recent blowout earnings. That was a far cry from the kind of response the stock saw earlier this year when it trounced consensus estimates.
Analysts were upbeat on the numbers, however — and the stock has gained 227% in the year to date, so some profit-taking was likely.
“Another remarkably strong set of results and guidance, in our view likely clearing sky-high hurdles set by investor expectations,” TD Cowen analyst Matthew Ramsay wrote in one example, as he kept an outperform rating and $700 target price on the stock.
“We continue to believe the industry is in the early innings of two transformational paradigm shifts toward ubiquitous acceleration and generative AI, with Nvidia’s wide moat potentially expanding. It’s just that simple.”
For more, read: Nvidia’s big beats don’t wow like they used to — but here’s the good news for the stock
Read now: Nvidia pulls further away from other chip makers by this one measure
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