Time to buy the dip or sell out of Magnificent Seven stocks?

The Nasdaq lost a massive one trillion dollars of value Wednesday as tech plunged. The selling was violent.

The index shed over 800 points in two days of trading. It is down 3.6% on the week against a marginal gain from the Dow Jones, pre Wall Street open on Friday. This reflects a major change of sentiment on the part of investors in tech stocks.

This is often the way when markets have moved too high, too quickly. But what now? As the week ends, the big question is: where does tech go from here?

Investors are finally waking up to all of the AI spend and realising it’s much more of an expense right now rather than a revenue generator. Active strategies have been projecting a sell off for quite some time in US tech, possibly longer than we would all like, but are they beginning to be proven right?

A huge focus on Magnificent Seven stocks

Right now the market is not impressed with the start of the earnings season for US tech. After driving the rally for much of 2024, they’re getting slammed into a wall right now. As well as earnings being a problem for tech, they’re also caught in a rotation cycle from tech to value.

There has been huge focus on the Magnificent Seven stocks which has led to an unprecedented level of concentration in a small group of very expensive tech giants and a strong FOMO sense among smaller investors who have piled into these names. Returns have been good but the revenues have not reflected the enthusiasm of shareholders. Bigger hitters like fund managers and pension funds don’t seem to like the numbers these companies are putting out this month.

Earnings from Tesla NASDAQ:TSLA and Alphabet NASDAQ:GOOGL seem to have been the cause of most concern for investors. Tesla missed earnings estimates Wednesday and analysts don’t sound enthused about the R&D costs or slowdown in sales the company was talking about.

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Alphabet also disappointed: again the story was about increased and sustained costs especially as the tech giant seeks to stay relevant in the new AI ballgame. This will naturally cost money, especially if you are a major incumbent like Alphabet. But that’s going to hit profits too. Investors are sadly not seeing the AI free lunch they were hoping for and sold Alphabet stock.

Despite these recent pullbacks, the S&P 500 and Nasdaq are still positive by 14% on the year, so there is a lot of potential downside if they do continue to fall.

That will be focusing minds as we go into next week. Other Magnificent Seven stocks report including Apple NASDAQ:AAPL and Microsoft NASDAQ:MSFT. Anything that shows slower growth in earnings could fuel more selling.

Earnings growth out of the Mag 7 is still very positive and outpaces the S&P 500 by a considerable margin, but it ain’t what it used to be, and that is what worries Wall Street. Some prop traders I spoke to Thursday evening had tried buying the dip on Tesla and got burned. It feels like there could be some falling knives on Wall Street next week.

Also bear in mind that some fund managers are already rotating out of Magnificent Seven stocks into smaller companies. This follows conventional wisdom that it will be smaller names that will benefit the most when the Fed starts to cut rates.

Cybersecurity stocks should still hold value

Despite the CrowdStrike outage debacle earlier in the week, the long-term story remains intact for CrowdStrike and other cybersecurity stocks. This is apparent from Acuity’s AssetIQ widget which was still indicating bullish sentiment towards CrowdStrike stock early in the week.

The current sell-off could be an opportunity to buy the dip for investors looking to get in on specific cybersecurity action. The sector has had a remarkable run over the last 12 months with strong performance from ETFs focused on this area. A Gartner survey has shown that CIOs see cybersecurity as their highest priority in 2024, with 80% intending to increase their security spending this year.

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