Mag 7 must perform 'incredibly well' to justify valuations

The Nasdaq Composite (^IXIC) is facing downward pressure Wednesday morning following earnings data out from two Magnificent Seven members: EV maker Tesla (TSLA) and Google parent company Alphabet (GOOGL, GOOG).

The Morning Wealth welcomes Commonwealth Financial Network CIO Brad McMillan to talk about his outlook on the upcoming results from the remaining Magnificent Seven stocks and whether Tesla and Alphabet's results are weighing on investor confidence.

McMillan points to "a threat of more pressure" ahead for the Magnificent Seven. He cites high valuations based on earnings growth as a key concern. "If you don't see that earnings growth, and clearly we didn't see that with either of those two companies, that means that valuation has to come into question," McMillan tells Yahoo Finance.

He notes that with the gap between the Magnificent Seven and the rest of the S&P 500 — commonly referred to as the 493 — being "extremely large," these tech giants are tasked with performing "incredibly well."

Regarding concerns about a potential consumer pullback affecting earnings, McMillan remains optimistic. He emphasizes that the consumer is healthy, citing robust job market conditions and continued wage growth. "The actual purchasing power of the average worker continues to grow in a very, very healthy way," he states, indicating he is not worried about a decline in consumer spending.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Angel Smith

Video Transcript

Take a look at the tech stocks here today.

You've got the NASDAQ falling off just about 1.7%.

Now this move lower coming after two of the mag seven stocks, Tesla and alphabet reported mixed earnings reports after the bell yesterday and it stamping some of the investors optimism on earnings this season.

So does this signal or maybe is this or some signal for what could be ahead from some of those other mag seven names for that?

We wanna bring in Brad mcmillan.

He's Commonwealth Financial Networks, Chief Investment Officer Brad, it's great to have you here.

So I'm curious how you're looking at the results that we got from Tesla and Google last night, not specifically on those results, but ultimately, what you think, maybe that signals turns out how high the bar is for Wall Street this time around and maybe does it point to the threat of more pressure here ahead?

I think it does point the bread of more bread of more pressure here, Sean.

And I think there's a couple of reasons for that.

First of all, when you're looking at valuations, when you're looking at multiples as high as they are for not just these two, but also all of the mag seven, they're building in, not just grow, not just earnings but also growth in earnings.

And if you don't see that earnings growth and clearly, we didn't see that with either of those two companies.

That means that valuation has to come into question the gap between the magnificent seven and the other members of the, of the S and P 500 even is so extremely large that for them to do that, they don't have to do well, they have to do incredibly well.

And just for them to mean revert, which is what we're starting to see means there could be a lot more downside ahead, how much of the reaction brad is tied exactly to how much these stocks have run up so far this year.

Well, I think that's just it when you look at the gap between fair value and where they are right now.

I mean, there's two points to this one is you look at the reaction, ok?

They're coming back to fair value, they're coming back to reasonable expectations.

But then there's also an opportunity here because the valuations on pretty much the rest of the stock universe are much, much more reasonable.

So as you start to turn away from the big cap stocks, the mag seven, there's also some opportunity that we're gonna see mean reversion in the other stocks.

Well, and that's an opportunity going forward.

Well, Brad, let's talk exactly about those other stocks.

In your note that you sent over, you talk about how we could see some growth specifically in consumer staples because of job and earnings growth and the working class.

Doing.

Well.

Explain the thinking on that to me because I've been fascinated by the very bifurcated consumer news that we've been getting out of these earnings prints from LV MA even from the airlines, I'm seeing some signs of a struggling consumer kind of across the board.

I think there are some signs and things are slowing.

You're 100% right.

There's no doubt about that.

But then when you look at the actual achievable income of most people, if you look at job growth, yes, it's down.

But it's still very healthy.

If you look at wage growth, you that again down, but still very healthy.

So the actual purchasing power with respect to the average worker continues to grow at a very, very healthy way.

Yeah, if you look at the chart there, you can see historically, we're still very strong.

So are things softening?

Yes, they are.

But are we seeing consumer spending continue to grow?

We are.

And I think one of the big deltas here, as you talk about the dichotomy here is the, the more wealthy contingent.

Yeah, maybe they're starting to pull back.

They're starting to get nervous, but the less affluent population continues to spend what they make and they're making more.

So I'm very comfortable with that growth continuing.