After Tesla’s disappointing quarter, the Magnificent Seven will face tests next week

(CNN) — The tech giant will face its next test to maintain its market leadership this week after its shares fell following a disappointing quarter for Tesla.

Tesla shares have fallen more than 26% so far in 2024 after the electric vehicle maker reported fourth-quarter operating margins that fell nearly in half from last year to 8.2%. Tesla also warned that it expects slower sales growth this year.

This comes as the rest of the “Magnificent Seven” (Nvidia, Microsoft, Meta Platform, Amazon, Apple, and Alphabet) continue to rise. Shares of Nvidia, Microsoft, Meta Platform and Alphabet closed at record levels several times last week.

Now they face trials of their own. Microsoft and Alphabet report their results this Tuesday, followed by Amazon, Meta Platform and Apple this Thursday. Nvidia will report its quarterly results on February 21.

Excluding Tesla, the Magnificent Seven’s total revenue is projected to increase 53.7% in the fourth quarter from a year earlier, according to FactSet. The earnings of companies included in the S&P 500 index, excluding those six companies, are expected to decline by 10.5%.

Big Tech faces highs this year

Due to the group’s huge impact on the broader market over the past year, Magnificent Seven’s quarterly results will be some of the most-watched results this earnings season.

According to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, the Magnificent Seven’s returns accounted for about 62% of the benchmark index’s total return of 26% last year.

While it’s unclear whether the elite tech group will continue its reign as the market’s top authority this year, shares will find it difficult to repeat their successful gains starting in 2023, some investors say.

“This year we have hit a high and difficult level,” said Saira Malik, Nuveen’s chief investment officer. “This will be a headwind for technology returns this year.”

Investors flocked to mega-cap tech stocks last year after ChatGPT’s launch in late 2022 sparked a wave of artificial euphoria. While the market rally became broader in late 2023 as optimism grew that the Federal Reserve would soon start cutting rates, Wall Street still has not abandoned its old strategy.

So far this year, the S&P 500 and Dow industrial indexes have reached all-time highs and surpassed their closing records several times. So is the tech-heavy Nasdaq 100.

But the Russell 2000 index, which tracks the performance of small-cap U.S. stocks, is down 2.4% for the year, compared with the S&P 500 index’s 2.5% gain. The S&P equal-weight index 500, which gives equal weighting to each stock’s performance, fell 0.4%.

Excluding Tesla, the “Magnificent Seven” have a combined market capitalization of about $12 trillion, according to data from Bespoke Investment Group as of Wednesday’s close. This is equivalent to more than 65% of the Russell 2000 market capitalization.

Shelby McFaddin, investment analyst at Motley Fool Asset Management, said she will focus on cash flow when analyzing quarterly earnings reports from big tech companies this week. His company owns all the shares of the Magnificent Seven except Tesla.

“You can model income growth until you’re blue in the face, but eventually you’ll run out of money. It cannot be infinite. So if you’re doing AI, what does it do?” McFaddin said. “Everyone has to respond to that, because there are a lot of aspirations in these evaluations.”

Some investors say that because of their status as one of Wall Street’s favorite defensive plays, the Magnificent Seven could extend their dominance even if the Federal Reserve does not cut interest rates as expected. Investors sought out big tech stocks during turbulent times like the regional banking crisis last year, thinking their bloated balance sheets and involvement in artificial intelligence made them reliable havens.

The Federal Reserve anticipates three rate cuts by 2024, and data released so far this year shows the economy remains resilient with rates currently running at a 23-year high. Still, this does not guarantee continued market strength.

“I am more concerned about the end of the year. Advertiser: What will be the demand? Are we heading towards a recession? I don’t know,” said Joe Mazzola, director of trader education at Charles Schwab.