By Lewis Krauskopf
NEW YORK (Reuters) – The U.S. stock rally is faltering as it faces a series of potentially market-shaking events, starting next week with corporate results from tech giants and the closely watched employment report, while the U.S. election also looms .
The benchmark S&P 500 is up about 22% on the year, but has retreated from record levels in recent days.
However, share prices remain highly valued, which could make shares vulnerable if near-term market events do not meet expectations.
According to LSEG Datastream, the price-to-earnings ratio of the S&P 500, based on earnings expectations for the next twelve months, is 21.8, close to the highest level in more than three years.
“People are going to be in trouble for most of the next week,” said Peter Tuz, president of Chase Investment Counsel Corp. “The market is expensive… Every time there is an elevated market, there is the potential for a bigger downside move. Disappointing happens.”
Five of the ‘Magnificent Seven’ group of mega-cap companies that have played a major role in driving the market in recent years will report quarterly results next week: Google parent Alphabet, Microsoft, Facebook owner Meta Platforms, Apple and Amazon.
Because of their enormous market values, these companies together account for 23% of the weight of the S&P 500, meaning the market’s reaction to their results could impact broader indexes in the coming days.
Shares of the Magnificent Seven trade at an average price-to-earnings ratio of 35 times, as the companies overall have posted much stronger earnings growth than the rest of the S&P 500. But that gap is expected to close in the coming quarters .
“I see a handful of companies that rightly have very high multiples, but if that monetization incentive disappears, there’s a lot of room underneath for those stocks to decline,” said Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments.
Investors will be watching these mega-cap companies to see if their increased spending on artificial intelligence begins to yield benefits.
AI “hyperscalers” – Microsoft, Amazon, Alphabet and Meta – will increase capital expenditures by 40% this year, while such capital expenditures for the rest of the S&P 500 companies are on track to decline 1% in 2024, according to BofA Global Research.
Tesla, the first of the Magnificent Seven to report results, saw its shares rise Thursday after CEO Elon Musk said he expects car sales to grow 20% to 30% next year.
