Big 7 vs Reality

· Nvidia suffers the major blow from the rising geopoliticalconflicts.

Last week, the big seven stocks climbed to an all-time high, as theirconcentration reached nearly 30% of the entire S&P 500 index.

However, excluding the „Magnificent Seven”, most stocks in the index looksomewhat undervalued. The S&P 493 (Ex-the Mega 7) trades at a handle of16x, below its 10-year average of 17x.

Regarding the „Big 7”, these large-cap U.S. tech stocks trade atconsiderably higher valuations than the other 493 stocks in the index. Manyinvestors have piled into those high-flying big techs: Apple, Microsoft,Amazon, Google, Nvidia, Tesla and Meta.

To put it differently, for every dollar you invest in the S&P 500,almost 30 cents go to just seven stocks, and the remaining 70 cents go tothe rest of the 493 other stocks.

So far this earnings season, stocks have seen a lot of downgrades. Fidelityforecasts Earnings Per Share (EPS) jumping 12% for the next two years,which looks ambitious. Should bond yields continue to climb to a 5-handle,levels not seen since 2007, there will be even more pressure for sky-flyingtech stocks to correct. Not to mention that the high probabilitythat we head into a recession scenario, which would be very negative forthe bulls.

The rising trade war between the US and China will only addfurther headwinds for equities, on top of the escalating conflict in the MiddleEast. Those geopolitical risks could lead to high-tech valuations,correcting the downside as risk premiums increase.

One of the leading stocks, Nvidia, has seen its biggest drop this year asPresident Biden restricted AI chip sales to China. The goal is to limitChina's "access to advanced semiconductors that could fuel breakthroughs inAI."

Nvidia substantially relies on China for the graphics processing units(GPUs), as the chipmaker generates over 22% of its sales from the 2ndlargest global economy.

Shareholders were stunned as the stock vaporized nearly $100 billion inMarket Cap in just 24 hours after the announcement from Biden’sadministration.

US commerce announced that the goal was to curb China’s access to advancedchips, which „could fuel breakthroughs in AI and sophisticated computers.”

GPUs have been a critical component for training AI models for tech,start-ups, and even governments.

Nvidia has been trending downward since September. If this trend continuesand breaks critical support levels of 410 and 400, it has the potential todrag down the remaining big tech giants' valuations and the entire S&P500 index with them.

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