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The Magnificent 7 Stocks Still Look Good. These 10 Smaller Stocks Could Be Even Better Buys.

The rich are about to get richer. As the year wraps up, technology stocks are likely to keep heading higher.

The Nasdaq Composite is already up about 36% this year. But it’s still 12% off its record peak, and there are reasons to think the technology sector can gain further ground from here—both in the short run and as we head into 2024. Most important, the rally looks ready to broaden beyond the stock market’s very largest names.

The strengthening dynamic for tech dates back to the horrible year that was 2022. As you’ll remember, but would prefer to forget, the index fell 33% last year. The losses piled up as the Federal Reserve tightened monetary policy and funding sources dried up for private and public companies alike. Meanwhile, parts of the tech economy continued to suffer aftereffects of Covid-19, which caused lasting disruptions in both supply chains and normal IT buying patterns.

Conditions shifted coming into 2023. The market decided that the Federal Reserve was almost done with rate increases, raising the potential for flat and eventually lower interest rates. Also, component shortages eased.

That became a supportive backdrop for OpenAI and its launch of ChatGPT, which turns one-year old on Nov. 30. The AI chatbot triggered a furious period of investment by tech companies seeking to leverage artificial intelligence for consumer and enterprise applications.

As it became clear that playing in the AI poker game would require deep pockets, investors poured cash into the sector’s largest companies—the Magnificent Seven of
Apple
(ticker: AAPL),
Microsoft
(MSFT),
Alphabet
(GOOGL),
Amazon.com
(AMZN),
Nvidia
(NVDA),
Meta Platforms
(META), and
Tesla
(TSLA). Those stocks on average have rallied 107% this year. On an equally weighted basis, the S&P 500 has gained just 3%. This year, bigger was better.

I’ve been speaking to a range of tech investors in recent weeks—the group is mostly bullish, and they see the spoils spreading beyond the Magnificent Seven. It boils down to a few themes: a more accommodating Fed; improving enterprise demand; the end of Covid-era spending distortions; and the rise of AI, the most impactful invention since the internet. Or movable type. Or the wheel.

Dan Niles, founder of the Satori Fund, a tech-focused hedge fund, thinks tech’s rally will extend through year end. One factor, he says, will be “window dressing” and tax-loss selling as portfolio managers spruce up their holdings for year-end disclosure reports. “Everybody wants to show they owned all the winners—the Magnificent Seven—and that they didn’t own the losers,” he says. “If your chart looks good, it keeps going up. If the chart looks bad, it keeps going down.”

Wedbush analyst Dan Ives is in sync with Niles on the near-term outlook. “There are trillions of dollars on the sidelines,” he says. “Institutions are bearish, but there’s a soft landing on the horizon, with the Fed set to cut rates next year. The spending environment for digital advertising and IT infrastructure is robust and upticking. And Street numbers are too conservative. This is the start of a new tech bull market that could last 18 to 24 months.”

Ives thinks the tech rally “spreads like a brushfire” from here, beyond the Magnificent Seven. He says the big driver will be—you guessed it—spending on AI hardware and software. But now, he contends, beneficiaries will go well beyond the megacaps that have come to dominate the AI conversation.

Ives, though, is still bullish on Microsoft and Apple, which just happen to be the two largest companies in the world by market value. He predicts both will reach $4 trillion market caps in 2024. (Apple is just below the $3 trillion level, with Microsoft a few hundred billion dollars behind.)

For Apple, which has reported four consecutive quarters of negative revenue growth, Ives sees a top line rebound, driven by iPhone sales and a growing services portfolio. Ives predicts Apple will launch “the AI App Store” in 2024, focused on generative AI apps that can run on iPhones.

Erika Klauer, a portfolio manager with Jennison Associates, also thinks conditions are shaping up for a strong 2024—and she’s as bullish as Ives about AI. “There’s still a long runway for growth,” she says.

Klauer is also a Microsoft bull despite the OpenAI turmoil. She thinks Microsoft’s aggressive approach to pricing its Copilot software for its 365 office suite—at $30 a seat a month—makes the company the “poster child” for monetizing AI enterprise software. But she notes that other companies aren’t far behind, including
Adobe
(ADBE),
ServiceNow
(NOW), and
Salesforce
(CRM). “If they’re all able to charge higher prices for AI versions of their software, that will drive the group,” she says.

Jonathan Curtis, portfolio manager of the Franklin Technology fund and the firm’s chief investment officer, told me on our Barron’s Live podcast that investors still “don’t fully appreciate what is coming on the back of generative AI.”

While his fund’s largest positions are Nvidia, Microsoft, Amazon, and Apple, he sees potential both up and down the AI food chain, including for chip manufacturer
Taiwan Semiconductor
(TSM); chip-design software companies
Synopsys
(SNPS) and
Cadence Design Systems
(CDNS); semiconductor equipment plays
Applied Materials
(AMAT) and
ASML
(ASML); and chips stocks
Advanced Micro Devices
(AMD) and
Marvell Technology
(MRVL).

The bottom line is that the pieces are in place for tech to reach higher highs, even after a big run. For tech investors, it’s time to give thanks.

Write to Eric J. Savitz at [email protected]

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