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Can S&P 500 rally without the Magnificent 7 leading the way? 'Easy' says BofA

Published 07/12/2023, 11:50 pm
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The market enthusiasm for artificial intelligence (AI) has attracted investors to high-flying tech stocks, reminiscent of past bubbles, raising concerns among analysts.

The surge in the so-called "Magnificent Seven" tech stocks parallels historical bubbles, such as the dot-com boom of the late '90s, which eventually led to a bust.

The “Magnificent 7” are collectively up about 80% this year while the rest of the S&P 500 index is up in the low single digits.

“Concerns about narrow breadth this year are misplaced in our view, given that with the exception of the Tech Bubble, bull markets since the 1980s ended with far better breadth than today’s,” analysts at Bank of America said.

They remind investors that only 24% of stocks in the S&P 500 trade within 10% of their all-time highs, lower than the historical average of 28% when compared to prior bull market peaks.

As a result, analysts say the S&P 500 can “easily” print the fresh record high even without the Magnificent 7 leading the way.

“We forecast an all-time high for the S&P 500 in 2024, with a year-end target of 5000. But unlike this year during which the Magnificent 7 did 70% of the work, we expect broader leadership,” the strategists added.

“If the seven stocks flatline, and if the multiples on forward earnings for the rest of the market flatlines, at about 15x on average, forecast EPS growth would put the index at 5100, above our target. The average stock would still be 13% below its post-COVID highs, with just one out of four eclipsing post-COVID highs.”

BofA’s tactical models have the Communication Services sector at a top position in the sector ranking, replacing Energy, which slipped to #3. Communication Services has consistently held the #1 spot in nine out of the past 10 months, outperforming the S&P 500 by over 20 percentage points during this period.

Tech climbed to #2, its highest rank since July, while Materials remained at the bottom for the second consecutive month. Industrials fell to the second-to-last sector, marking its lowest position since June 2021.

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