Why Alphabet, Amazon, and Other “Magnificent Seven” Stocks Rallied Today

There’s strong evidence that the catalyst that sparked the market rebound this year is changes in the artificial intelligence (AI) landscape. After collectively turning in their worst performance since 2008, the major market indexes have charged sharply higher this year, fueled by the possibility of widespread efficiency gains resulting from generative AI.

With that as a backdrop, search leader Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) climbed 2.6%, e-commerce pioneer Amazon (NASDAQ: AMZN) rose 2.8%, and social media maven Meta Platforms (NASDAQ: META) climbed 3.3%, as of 1:53 p.m. ET.

Positive sentiment from a Wall Street analyst helped fuel Amazon’s gains, while a report published this weekend suggested the ongoing AI-fueled rally will help drive the so-called “Magnificent Seven” stocks higher in 2024.

AI will likely drive further market gains

Technology stocks have been the primary beneficiary of this year’s market rally, with the tech-heavy Nasdaq Composite up 42% as of the market close on Friday, compared to 23% gains for the S&P 500. Many of the biggest contributors are those companies at the bleeding edge of AI.

That trend will likely continue into 2024, according to financial and investing weekly Barron’s. The publication released its predictions for the coming year, specifically citing the Magnificent Seven stocks as being poised for additional upside, even after this year’s spectacular gains (through Market close on Friday):

• Alphabet: Up 50%

• Amazon: Up 78%

• Apple: Up 52%

• Meta Platforms: Up 177%

• Microsoft: Up 54%

• Nvidia: Up 235%

• Tesla: Up 106%

Each of these companies is an AI powerhouse in its own right and well positioned to profit by implementing these next-generation algorithms.

The report suggests that the current rally was driven by three factors: expectations that the Federal Reserve Bank is finished with its campaign of interest rate hikes now that inflation is beginning to subside, the willingness of technology companies to cut costs to improve their bottom lines, and the ongoing opportunity represented by AI. These factors will continue to fuel the rally in the coming year, perhaps none so much as AI.

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Generative AI is expected to grow at a compound annual growth rate (CAGR) of 42%, topping $1.3 trillion by 2032, according to data provided by Bloomberg Intelligence. Given the opportunity, it’s understandable the biggest players could continue to climb.

Providing additional fuel for Amazon today was bullish commentary by analysts at Roth MKM. The investment bank raised its price target to $180, suggesting potential upside of 20% from Friday’s close. It also named Amazon its Top Mega Cap pick for 2024, citing “accelerating revenues and expanding operating margins.”

Ringing the AI cash register

The impact of AI will be far-reaching, but each of these three companies has carved out a lucrative niche in the AI revolution:

• Amazon has deployed AI algorithms across a broad cross section of its e-commerce empire and has added a host of AI tools for its cloud infrastructure customers.

• Alphabet’s Google has a long and storied history with AI and pioneered the use of AI in its industry-leading digital advertising. The company has already debuted many new generative AI tools in its most popular products and services, while also offering new AI tools to its cloud users.

• Meta Platforms is also an AI pioneer, using the technology to serve relevant content on its social media platform while identifying users in photos posted on its site. The company recently released Llama AI, its latest AI model, making it available on the major cloud computing platforms.

Each of these companies is leading the way in AI and will likely continue to benefit from these ongoing secular tailwinds. Furthermore, the widespread use of AI is only just getting started, so it only makes sense that there will be additional gains as adoption accelerates.

From a valuation standpoint, each of these stocks is relatively inexpensive. Amazon is the cheapest, selling for just 2 times forward sales, while Alphabet and Meta Platforms are selling for multiples of 5 times and 6 times forward sales, respectively. While these valuations might deter value investors, they should be viewed in terms of the abundant opportunity ahead.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.

Why Alphabet, Amazon, and Other “Magnificent Seven” Stocks Rallied Today was originally published by The Motley Fool