The dominance of big tech companies may be coming to an end, Bank of America analysts say. As the Magnificent Seven tech giants surged in the S&P 500, some macroeconomic and industry trends signal potential troubles ahead, the bank said.
First, BofA notes that the primary driver of tech companies’ outperformance is revenue. However, the difference between tech and non-tech revenue growth is expected to narrow significantly by the fourth quarter of this year. This implies an increase in returns towards the end of 2024, reducing Tech’s relative advantage.
Second, BofA’s global regime models, which changed in February, now favor high value and cyclical stocks over technology stocks. This shift points to a potential pivot away from technology and toward other sectors that may offer more attractive valuations and growth prospects.
Third, companies that have benefited from providing efficiency tools, such as today’s NVIDIA (NASDAQ:), may lose momentum as sales growth slows and capex spenders begin to realize productivity gains. The transition could lead to slower growth for companies that have relied heavily on capex-based sales.
Finally, BofA believes that higher interest rates over an extended period could make high free cash flow and dividend yields more attractive relative to tech stocks. While some of the Magnificent Seven may offer such financial benefits, not all of them do, potentially prompting investors to look elsewhere for opportunities.