By Paul R. La Monica

Wall Street was in need of something to send the stock market higher as it recovers from its tariff-induced plunge. Now, there are hopes that the Magnificent Seven may be coming to the rescue.

Stocks rose Thursday in response to strong earnings from Microsoft and Meta Platforms, the owner of Facebook. Adding to the gains was that while many companies are suspending their financial guidance because of uncertainty about the effects of President Donald Trump's trade war, both Microsoft and Meta issued upbeat forecasts for the second quarter.

If the return of the Big Tech growth stock trade trumps worries about the tariffs, it could mean the worst is over for the market. Already, the Dow Jones Industrial Average and S&P 500 have gained for seven straight sessions and are on track to make it an eight-day winning streak.

The outlook may be clearer after Apple and Amazon.com report their latest earnings after the closing bell. But some are concerned that the recent rally will be short-lived -- and that tech stocks may not be a safe place to hide for much longer.

For one, valuations are still stretched for the megacaps of the Nasdaq. The Roundhill Magnificent Seven ETF trades for nearly 28 times earnings estimates. That is below its five-year average price/earnings ratio of 33, but it is hardly cheap.

And given that Apple, Amazon, Alphabet, Microsoft, Meta, Nvidia, and Tesla make up about one-third of the S&P 500's total market value of $47.2 trillion, it means that the broader market also remains pricey. The S&P 500 is trading at 21 times earnings, only slightly below its five-year of 22.

"This could be a slow grind type of market as companies get used to higher operating costs from tariffs. All of that is an adjustment that will take place and that does not bode well for corporate profits, especially since valuations are not reflecting that risk," said Wasif Latif, president and chief investment officer with Sarmaya Partners, an asset- management firm.

"For megacap tech and large growth stocks, the consensus seems to be that they are relatively immune to tariffs, but what may unfold over time is the realization that they are not," Latif said.

Yes, Microsoft and Meta were able to give bullish outlooks for the second quarter. But that could be the exception, not the rule -- even for the tech sector.

Meta's social media rival Snap, for example, declined to give financial guidance for the second quarter when it reported earnings this week. Snap said that was due to "the uncertainty with respect to how macro economic conditions may evolve in the months ahead, and how this may impact advertising demand more broadly."

This suggests that not even the Magnificent Seven will escape the trade war unscathed.

Another point to watch is Nvidia's earnings report, due at the end of May. Investors will obviously be paying extremely close attention because the chip maker has already said it would take a $5.5 billion charge due to U.S. restrictions on future sales of some of its AI semiconductors to China.

That is all the more reason that investors need to be more diversified. Owning an index fund, one common approach, may not be enough to accomplish that.

"Diversification is important, globally as well as within the U.S.," said Nelson Yu, head of equities at AllianceBernstein. "There are historically high levels of concentration with growth stocks and the Magnificent Seven."

Other sectors, such as financial services, may be more attractive, Yu said. Big banks, brokerage firms and exchange owners should benefit from increased trading volume resulting from this market volatility. The hope of eventual deregulation efforts from the Trump administration could provide a boost to large banks as well.

Analysts have boosted their earnings estimates for the financial services sector, and big Wall Street firms in particular.

Ed Yardeni of Yardeni Research pointed out in a report Thursday that earnings forecasts for financial services companies have risen 4.5% this year, the biggest gain for any of the 11 S&P 500 sectors. The change is due in large part to a 10.6% boost to estimates for investment banking and brokerage firms and increases of about 8% each for diversified banks and consumer finance companies.

Yu added that healthcare stocks, particularly equipment companies, should see higher sales and profits due to increased demand for various types of medical devices.

Both the financial and healthcare sectors are cheaper than the broader market. The Financial Select Sector SPDR and Health Care Select SPDR ETFs each trade at 17 times earnings estimates for 2025.

That matches the forward P/E for the Invesco S&P 500 Equal Weight ETF. Moves in the Magnificent Seven have less effect on the equal-weighted ETF than on the market benchmark, which the tech stocks dominate because it is weighted according to market capitalization.

In a market as volatile as this one, owning more attractively valued stocks is a way for investors to protect themselves from more losses.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

May 01, 2025 14:51 ET (18:51 GMT)

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