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Many analysts think small-cap, risky tech stocks could outperform mega-cap tech stocks this year. In 2023, investors poured money into the top seven mega-cap technology stocks, or the “Magnificent Seven,” including Apple, Alphabet, Amazon.com, Meta Platforms, Microsoft, Nvidia, and Tesla. But lower bond yields and weaker valuations have made small-cap tech stocks more attractive this year.
Bloomberg's Magnificent 7 Price Earnings Index has more than doubled in the last year, contributing to a +54% rise in the Nasdaq 100 Stock Index ($IUXX) (QQQ). Main Street Research said, “If you didn't own the top seven stocks last year, you missed out on most of the returns.” However, there are signs of a reversal in this trade. All small- and mid-cap stocks in the technology sector have kept pace with mega-caps since the end of October. Additionally, the average analyst price target for small-cap tech stocks is +14.4% this year, compared with less than +7% for the broader Nasdaq 100, according to Bloomberg data.
It's a positive development for small-cap tech stocks, with nearly 80% of Nasdaq 100 stocks trading above their 50-day moving average, compared with just 13% in October. Additionally, more than 80% of Nasdaq 100 stocks are above their 200-day moving average, more than twice as high as in October. A sharp drop in bond yields drove most tech stocks higher, as the 10-year T-note yield fell more than -100 basis points to below 4.00% from 5.00% in October. Rising interest rates tend to weigh on small-cap stocks and stocks with high valuations by raising the cost of financing and eroding the present value of expected future returns.
A soft landing and the prospect of lower interest rates are supporting small- and mid-cap tech stocks. “These stocks are more cyclical than the Magnificent Seven's tech stocks, so a soft landing would be more beneficial for them overall, especially if they are trying to bounce back from last year,” the Hermetic Federation said. . Also, while artificial intelligence (AI) was a key driver for the seven companies, it should help expand the gathering if more companies can enter the space and benefit from it. ”
The cheap valuations of small-cap tech stocks relative to large-cap tech stocks is another factor supporting the outlook for small-cap stocks to outperform large-cap stocks this year. The small-cap tech index trades at 16.6 times forward earnings, lower than its 10-year average. However, the Magnificent 7 Index trades at a multiple of estimated earnings of 28, making it much more expensive than small-cap stocks. Main Street Research said: “The tech industry should continue to be in a very active bull market in 2024, but it won't be limited to top companies and will spread across sectors.”
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On the date of publication, Rich Asplund did not have (directly or indirectly) any positions in any securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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