What bubble? The Magnificent 7 stocks are actually undervalued, JPMorgan says

• Mega-cap tech leaders look cheap compared to the rest of the S&P 500, JPMorgan says.
• [T]he group is currently trading less stretched than a few years ago, given earnings delivery."
• The group is still at risk if earnings disappoint investors' high expectations, the analysts said. 

Investors fretting over a potential bursting of the tech bubble can calm down, as the Magnificent Seven looks pretty inexpensive relative to the rest of the stock market, JPMorgan says. 

Analysts at the bank said valuations among the group of AI-energized mega-cap stocks are still reasonable compared to average prices for the rest of the S&P 500 over the past five years, despite their disproportionate share of returns for the benchmark index this year. 

"There is a concern over the very strong outperformance of Mag-7, but we note that the group is currently trading less stretched than a few years ago, given earnings delivery," JPMorgan's analysts wrote in a note on Monday. 

The Magnificent Seven – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – command nearly 30% of the S&P 500 market cap. That's sparked concerns about overconcentration and has fueled fears of a sudden end to the AI bubble mirroring the collapse of the dot-com craze in 2000. 

Yet, according to the JPMorgan team, the group of mega-cap leaders "is not getting more expensive, at least not relatively," and instead, overvaluation appears more pronounced in European cyclical sectors, as those stocks are currently trading at higher-than-average prices compared to defensive stocks.

"This is not to say that the [Magnificent Seven] group is immune to profit disappointments ahead, and it could prove to be more cyclical than many currently assume, but in the case of general earnings disappointment, these stocks could still hold out better than traditional cyclicals," the analysts added. 

JPMorgan acknowledged that the Magnificent Seven achieved a remarkable earnings outperformance in 2023, with their net income growth surging 27%. That's a stark contrast with the 4% net income loss of the remaining S&P 500 companies. 

"The bulk of the equity upside last year can be attributed to Magnificent 7, and the trend appears to be continuing this year, as well," the note added, saying that they find the narrow market leadership is "ultimately unhealthy."

Observers have noted the diverging fortunes of the Magnificent Seven, as Tesla and Apple slump this year, and AI stalwarts like Nvidia and Meta Platforms surge. Nvidia has seen its stock price surge by 75% in 2024, following a bullish demand update in its quarterly earnings that sent investors into a renewed frenzy over the tech.