Stock Market Shock: The Rise of the New 'Fab Four' as Apple and Tesla Stumble!

The trade of the "Magnificent Seven" appears to be losing momentum, yet the stock market continues its upward trajectory.

Despite Apple and Tesla experiencing significant declines, the S&P 500 surged by 10% in the first quarter, marking its strongest start since 2019. 

While Apple shares dropped by 11% and Tesla by nearly 30%, Alphabet initially struggled before rallying in the last three weeks to finish 8% higher. 

The other four tech giants in the group, known as the Magnificent Seven—Nvidia, Meta Platforms, Microsoft, Amazon.com—continued their exceptional performance, surpassing the broader market. Market analysts have even dubbed them the new "Fab Four."

Some investors interpret this as a positive sign, suggesting that the market rally is not solely reliant on Apple and Tesla but includes other sectors as well. 

All S&P 500 sectors, except real estate, posted gains in the first quarter. Small-caps, industrial, and financial services stocks notably surged, indicating broader market optimism.

The market's enthusiasm is fueled by optimism about the economy's recovery from recession and expectations of a Federal Reserve pivot towards interest rate cuts. 

Additionally, the fervor around the future of artificial intelligence has contributed to the market's excitement.

Despite concerns about the divergence in big tech stocks signaling a potential exhaustion in the rally, the S&P 500's value has surged over $9 trillion since late October, with 22 record closes in 2024.

In the coming days, investors will closely monitor U.S. manufacturing data and the monthly jobs report to gauge the trajectory of the market and the economy.

Nvidia remains a standout performer, driven by soaring demand for AI-related computing power. 

Its shares have surged by over 80% this year, following a tripling in 2023. Meta's shares have also soared due to investments in AI, leading to smarter targeted ads. 

Microsoft overtook Apple as the largest U.S. company earlier this year, while Amazon has significantly improved its profitability.

Although these stocks have seen recent gains, some are trading at lower multiples than last year. For instance, Nvidia's multiple is now 35, down from its peak of 62 in May 2023, and Amazon's is 40, compared to 62 in 2023. The S&P 500 is trading at 21 times future earnings, slightly higher than last year's 19.

Despite the contributions of the Fab Four to the S&P 500's first-quarter surge, investment strategists anticipate a rotation out of big tech stocks into other sectors, as other companies' earnings are expected to outperform those of the Magnificent Seven by the fourth quarter.

Jonathan Golub of UBS suggests that the explosive growth posted by the Magnificent Seven at the end of last year might be challenging to surpass, potentially ending their earnings dominance.

Tesla and Apple, once drivers of market movements, are facing challenges. 

Tesla is struggling against Chinese competitors and expects slower growth in 2024. Apple is dealing with legal issues, a weaker iPhone demand cycle, and concerns about its AI strategy.

This year marks a shift from the previous year when weakness in the Magnificent Seven would have dragged the broader market down. Now, the market seems to be resilient even as these stocks face challenges, suggesting a more balanced market environment.