The so-called magnificent 7 and other tech stocks have been helping to drive stock market gains this year. Vitali Mossounov, Director and Co-Lead of Fundamental Equity Research at TD Asset Management, discusses whether they can keep that momentum going into next year with MoneyTalk’s Greg Bonnell.
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Technology stocks have had a good run this year. The tech-heavy NASDAQ composite up more than 37%. But will that performance continue into 2024? Joining us now to discuss, Vitali Mossounov, VP, director, and co-lead of Fundamental Equity Research at TD Asset Management. Vitali, great to have you back on the show.
Great to be back, Greg. How are you?
I'm not too bad for a guy getting close to the end of the year. And the big story, the big theme of the year has been tech, sort of taking us by surprise. Quite the year. Let's recap what we saw.
Remember, we sat here in mid-January and talked about, this is a make it or break year for tech. It had been a bad 2023, and we were looking for the litmus test. The way we described it was, will revenue growth accelerate, and will these companies get costs under control? 11 months later, the words, the numbers speak for themselves. They did it. And share prices have acted in a very predictable way when you deliver above expectations in the stock market.
OK, a lot of those expectations, though, heading into the year weren't that great, and then you had the Magnificent Seven show up and artificial intelligence show up.
That really showed up.
A lot of people have said there's not been a lot of market breadth, though. How do we read it that way?
Well, before we talk about breadth, let's just look at the numbers to put things in context. And we have a chart for that showing-- it's a simple chart-- year to date returns. And that's one that really stands out. Magnificent Seven up 98% for the year. These are big, sophisticated companies doubling in less than a year.
Look, the performance has been good in other places, in fact, great. The NASDAQ 100 up 46. The S&P still up 21. Those are great numbers as well.
But, yes, you could say the breadth hasn't been there. But, still, it's been OK. We could dive into breadth a little bit more.
Yeah, because that's a pretty telling chart, right?
Yeah.
You take the Magnificent Seven, and they're just way-- even if you're not a chart analyst, you can see way up here, everyone else not bad, but down here.
Different postal code there. Yeah, different postal code.
Yeah, and as far as breadth is concerned, look, it's a fair statement. And I've got another chart I wanted to share. It's a little different. It's the advancers and decliners. So any given day, you measure how many stocks go up, how many stocks go down. If there's more going up than down, then that line is positive. If it's negative, that means there's more stocks going down. So you'd expect, typically, that to be a positive number. There should be, on any given day, more stocks increasing in value than falling. The markets tend to go up over time. And what you see there in that 10-year chart, on average, the horizontal line, on average, there are 65 more stocks going up than going down in price. But over the course of time, that has changed a little. So if you look at 2023 specifically, if you looked at that without knowing the performance of stocks, what would your first guess be? How did stocks do when you see that line all the way there at the bottom?
You'd think not very well.
You'd think not very well.
I don't like to see things go down. I like to see them go up.
What that tells you is most stocks spent this year, or most of the year, we've seen more stocks falling than rising. And yet we just saw that 98% of the Mag Seven and the great returns for the NASDAQ.
So, indeed, the breadth hasn't been there. But I think we can extract some optimism out of that as well, because we're heading into a new year, we're turning a new leaf, and there are a lot of companies that have still kept growing their earnings, that have still gone on conducting their business rather well, and their shares have not been rewarded. So from a breadth perspective, we could certainly see a 2024 where the Magnificent Seven take a bit of a pause and the rest of the market has a chance to make its move higher.
All right, so an argument there that perhaps, even though we don't like to see lines and big chunks of a graph go negative, that there's a pretty good setup outside of the Magnificent Seven. How do you hand off the baton? What would have to happen for those other stocks to say, now give us a bit of the limelight?
Well, flip that question, actually, on you and say, well, what would have to happen for the Big Seven not to perform so well, right? And that is the million dollar question in my mind. They're both valid questions.
But I did bring a table to walk us through that as well, and how we started the year with a litmus test. Let's see if there's a natural handover from '23 to '24. And I have five variables I wanted to look at. These are the variables that typically do drive these stocks. So let's compare the setup for '23 with the setup for '24.
All right, so here we go. The Driver column, we got your five, accelerating revenue growth, falling costs, attractive valuations, falling discount rate, and a good story. 2023 and 2024 I feel like this. So let's play the game.
Let's play the game. Well, 2023 revenue growth was really bad heading into the year. If you look at the back end of '24, the big tech companies, their revenue growth was close to zero. After Q3, it's as good as 12%, 13%. So we got our accelerating revenue growth. That was a good setup for the stocks.
Heading into 2024, I wouldn't bank on that. They might. They might not. But more or less, they're growing in the low- to mid-teens. That's more appropriate for these companies. So on the first factor, the setup for '23 was better than the setup we're getting for '24.
Right, the next one on the list is falling costs, I believe, and you talk about some cost discipline. So--
That's right.
--let's compare the two years.
Heading into 2023, again, let's go back to the fourth quarter of 2022. These companies' spending, we've said this before, like drunken sailors. Costs were up 20% year over year, 30 for some businesses. Year of efficiency, year of discipline, not just at Meta. As you exit the third quarter of this year, for the big five tech companies, expenses grew just 2% for the group. So falling costs, investors like that, because that's more profits in our pockets, that was a nice catalyst for the stocks.
Heading into 2024, you're not going to get that again. These are growth businesses. They're going to need to invest back into the business. I don't think there's any way they can grow expenses as little as 2% next year. So, again, an incrementally worse setup than we had heading into '23.
That's the first two. Let's get to number three now and see how we set up. They found some religion on costs. What about attractive valuations?
Another one that I think we're going to give the nod to '23 over '24. Heading into 2023, valuations were down to about 20 times earnings for the NASDAQ 100, again, those big tech companies trading in the US. That is a historical low, as far as measured at least from the 2018 period.
Today the stocks have done well. The earnings have done well. But the stocks, they've seen some multiple expansion. Sentiment is higher. You're paying 24, 25 times, not egregious in a historical context. But, again, a lower valuation, all else equal, is better than a higher valuation. And heading into '23, investors had a better set up. They were paying less for businesses.
All right, I feel like '23 is winning this game.
Winning 3 to nothing so far.
Let's go back. We're at number four now. I believe it was a falling discount rate. So how does this size up?
Well, this is one we've talked about now ad nauseam for a couple of years. And rates have been rising and rising and rising and rising far longer than many observers expected. And, of course, with some of the growth of your companies, their cash flows are further out into the future. And in the market in general, for companies, their cash flows are in the future. So the higher the rate that is competing with those cash flows, both in terms of putting your money in a GIC, or simply discounting those cash flows back, the less that company is worth.
'23 had a real headwind. Rates kept rising and rising and rising. They just rolled over a few weeks ago. But heading into 2024, it looks like rates are falling, which is an exogenous variable, but an important one for these stocks, and could act as a tailwind.
All right, 2024 finally gets a check mark. The final thing is investors. We look at fundamentals. We look at numbers. We'll say, we like a good story, though, as well.
We like a good story. And I am not being facetious with this one. It is true. Stocks do well, but they need to have a good story to do well. You cannot just have a bad story and do well.
And heading into '23, there was no story. It was really early for AI. Some had begun to talk about it. But it was mostly bad, bad, bad.
Heading into '24, AI is becoming real, you could say. Product launches are coming. It's not just talk. Alphabet, Google last night with its Gemini. We can talk about that in a bit. But there's a really good AI story heading into 2024. So when I compare the quality of the narratives and what can support sentiment in stock prices, I think 2024 wins on that one again. [LOGO AUDIO]
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Technology stocks have had a good run this year. The tech-heavy NASDAQ composite up more than 37%. But will that performance continue into 2024? Joining us now to discuss, Vitali Mossounov, VP, director, and co-lead of Fundamental Equity Research at TD Asset Management. Vitali, great to have you back on the show.
Great to be back, Greg. How are you?
I'm not too bad for a guy getting close to the end of the year. And the big story, the big theme of the year has been tech, sort of taking us by surprise. Quite the year. Let's recap what we saw.
Remember, we sat here in mid-January and talked about, this is a make it or break year for tech. It had been a bad 2023, and we were looking for the litmus test. The way we described it was, will revenue growth accelerate, and will these companies get costs under control? 11 months later, the words, the numbers speak for themselves. They did it. And share prices have acted in a very predictable way when you deliver above expectations in the stock market.
OK, a lot of those expectations, though, heading into the year weren't that great, and then you had the Magnificent Seven show up and artificial intelligence show up.
That really showed up.
A lot of people have said there's not been a lot of market breadth, though. How do we read it that way?
Well, before we talk about breadth, let's just look at the numbers to put things in context. And we have a chart for that showing-- it's a simple chart-- year to date returns. And that's one that really stands out. Magnificent Seven up 98% for the year. These are big, sophisticated companies doubling in less than a year.
Look, the performance has been good in other places, in fact, great. The NASDAQ 100 up 46. The S&P still up 21. Those are great numbers as well.
But, yes, you could say the breadth hasn't been there. But, still, it's been OK. We could dive into breadth a little bit more.
Yeah, because that's a pretty telling chart, right?
Yeah.
You take the Magnificent Seven, and they're just way-- even if you're not a chart analyst, you can see way up here, everyone else not bad, but down here.
Different postal code there. Yeah, different postal code.
Yeah, and as far as breadth is concerned, look, it's a fair statement. And I've got another chart I wanted to share. It's a little different. It's the advancers and decliners. So any given day, you measure how many stocks go up, how many stocks go down. If there's more going up than down, then that line is positive. If it's negative, that means there's more stocks going down. So you'd expect, typically, that to be a positive number. There should be, on any given day, more stocks increasing in value than falling. The markets tend to go up over time. And what you see there in that 10-year chart, on average, the horizontal line, on average, there are 65 more stocks going up than going down in price. But over the course of time, that has changed a little. So if you look at 2023 specifically, if you looked at that without knowing the performance of stocks, what would your first guess be? How did stocks do when you see that line all the way there at the bottom?
You'd think not very well.
You'd think not very well.
I don't like to see things go down. I like to see them go up.
What that tells you is most stocks spent this year, or most of the year, we've seen more stocks falling than rising. And yet we just saw that 98% of the Mag Seven and the great returns for the NASDAQ.
So, indeed, the breadth hasn't been there. But I think we can extract some optimism out of that as well, because we're heading into a new year, we're turning a new leaf, and there are a lot of companies that have still kept growing their earnings, that have still gone on conducting their business rather well, and their shares have not been rewarded. So from a breadth perspective, we could certainly see a 2024 where the Magnificent Seven take a bit of a pause and the rest of the market has a chance to make its move higher.
All right, so an argument there that perhaps, even though we don't like to see lines and big chunks of a graph go negative, that there's a pretty good setup outside of the Magnificent Seven. How do you hand off the baton? What would have to happen for those other stocks to say, now give us a bit of the limelight?
Well, flip that question, actually, on you and say, well, what would have to happen for the Big Seven not to perform so well, right? And that is the million dollar question in my mind. They're both valid questions.
But I did bring a table to walk us through that as well, and how we started the year with a litmus test. Let's see if there's a natural handover from '23 to '24. And I have five variables I wanted to look at. These are the variables that typically do drive these stocks. So let's compare the setup for '23 with the setup for '24.
All right, so here we go. The Driver column, we got your five, accelerating revenue growth, falling costs, attractive valuations, falling discount rate, and a good story. 2023 and 2024 I feel like this. So let's play the game.
Let's play the game. Well, 2023 revenue growth was really bad heading into the year. If you look at the back end of '24, the big tech companies, their revenue growth was close to zero. After Q3, it's as good as 12%, 13%. So we got our accelerating revenue growth. That was a good setup for the stocks.
Heading into 2024, I wouldn't bank on that. They might. They might not. But more or less, they're growing in the low- to mid-teens. That's more appropriate for these companies. So on the first factor, the setup for '23 was better than the setup we're getting for '24.
Right, the next one on the list is falling costs, I believe, and you talk about some cost discipline. So--
That's right.
--let's compare the two years.
Heading into 2023, again, let's go back to the fourth quarter of 2022. These companies' spending, we've said this before, like drunken sailors. Costs were up 20% year over year, 30 for some businesses. Year of efficiency, year of discipline, not just at Meta. As you exit the third quarter of this year, for the big five tech companies, expenses grew just 2% for the group. So falling costs, investors like that, because that's more profits in our pockets, that was a nice catalyst for the stocks.
Heading into 2024, you're not going to get that again. These are growth businesses. They're going to need to invest back into the business. I don't think there's any way they can grow expenses as little as 2% next year. So, again, an incrementally worse setup than we had heading into '23.
That's the first two. Let's get to number three now and see how we set up. They found some religion on costs. What about attractive valuations?
Another one that I think we're going to give the nod to '23 over '24. Heading into 2023, valuations were down to about 20 times earnings for the NASDAQ 100, again, those big tech companies trading in the US. That is a historical low, as far as measured at least from the 2018 period.
Today the stocks have done well. The earnings have done well. But the stocks, they've seen some multiple expansion. Sentiment is higher. You're paying 24, 25 times, not egregious in a historical context. But, again, a lower valuation, all else equal, is better than a higher valuation. And heading into '23, investors had a better set up. They were paying less for businesses.
All right, I feel like '23 is winning this game.
Winning 3 to nothing so far.
Let's go back. We're at number four now. I believe it was a falling discount rate. So how does this size up?
Well, this is one we've talked about now ad nauseam for a couple of years. And rates have been rising and rising and rising and rising far longer than many observers expected. And, of course, with some of the growth of your companies, their cash flows are further out into the future. And in the market in general, for companies, their cash flows are in the future. So the higher the rate that is competing with those cash flows, both in terms of putting your money in a GIC, or simply discounting those cash flows back, the less that company is worth.
'23 had a real headwind. Rates kept rising and rising and rising. They just rolled over a few weeks ago. But heading into 2024, it looks like rates are falling, which is an exogenous variable, but an important one for these stocks, and could act as a tailwind.
All right, 2024 finally gets a check mark. The final thing is investors. We look at fundamentals. We look at numbers. We'll say, we like a good story, though, as well.
We like a good story. And I am not being facetious with this one. It is true. Stocks do well, but they need to have a good story to do well. You cannot just have a bad story and do well.
And heading into '23, there was no story. It was really early for AI. Some had begun to talk about it. But it was mostly bad, bad, bad.
Heading into '24, AI is becoming real, you could say. Product launches are coming. It's not just talk. Alphabet, Google last night with its Gemini. We can talk about that in a bit. But there's a really good AI story heading into 2024. So when I compare the quality of the narratives and what can support sentiment in stock prices, I think 2024 wins on that one again. [LOGO AUDIO]
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