Bob’s Journal 6/5

Are the Magnificent Seven Magnificent Again?

The seven growth stocks that dominated stock returns in recent years, known as the Magnificent Seven, tumbled in early 2025.

They fell especially hard after President Donald J. Trump began announcing tariffs. But they bounced back after most of the tariffs were delayed or reduced.

Yet, the Magnificent Seven aren’t back to their highs of early 2025 and are down more than 3% so far in 2025. They’ve been outpaced by the broader S&P 500 and by the other 493 stocks in the index.

You can see that by comparing the returns of the exchange-traded fund (ETF) Roundhill Magnificent Seven (MAGS) to the major indexes and other ETFs.

For example, the Invesco S&P 500 Equal Weight (RSP) is up more than 1% for the year.

The Magnificent Seven partly are being dragged down by Tesla (TSLA), which is having a lot of problems this year. But the other six members of the Magnificent Seven also are lagging the broader market.

Of course, looking back over one year or longer, the Magnificent Seven still are well ahead of other indexes.

The question for investors is whether the stumble so far this year is a change in the trend or only a pause in the Mag 7’s historic outperformance.

The S&P 500 has had strong returns in recent years. About one third of the index’s return over the last 10 years was attributable to an increase in stock valuations.

The Magnificent Seven also had an increase in stock valuations, but it wasn’t as big a driver of their stock returns. In fact, valuations declined for two of the group, Amazon and Meta.

Most of the higher returns in the Magnificent Seven stocks over the last 10 years were attributable to higher earnings growth. It appears that investors have consistently underestimated the earnings growth of these companies.

The Magnificent Seven started to falter after the release of the artificial intelligence (AI) tool from DeepSeek triggered a rethinking of the case that U.S. companies would dominate AI.

But the Liberation Day tariffs caused investors to revalue the Magnificent Seven stocks more than the broader market.

That’s somewhat ironic, because the Magnificent Seven generally aren’t likely to be affected by most tariffs. But they are prime targets for other types of trade retaliation. In fact, several members of the Magnificent Seven have faced lawsuits, sanctions and restrictions from a number of countries.

Despite these risks, investors could be underestimating the Magnificent Seven again.

The weaker members of the Magnificent Seven right now appear to be Tesla and Apple.

But for most of the group the recent earnings reports indicated their businesses remain healthy and are likely to replicate the earnings growth of recent years. They’re likely to benefit from a lot of the increased spending on AI for a few more years as well as continued strong performance in their core businesses.

Even so, investors appear to be skeptical of the companies. Current pricing indicates investors believe the companies will generate lower earnings growth than they have in the recent past.

Investors have consistently underestimated the ability of these companies to continue generating strong earnings growth. That’s why valuations for the companies haven’t increased as rapidly as valuations for the rest of the market.

There are many unknowns about these companies and the economy, of course. But right now, it appears that the companies as a group are likely to generate earnings growth exceeding what is reflected in their stock prices.

Signs of Trouble in the Housing Market

It might be a good time to buy a home, for those with the cash, but most indicators of the housing market aren’t good.

Currently, sellers of homes far outnumber buyers, according to online real estate brokerage Redfin.

The firm said there were 500,000 more sellers than buyers in the United States during April. Outside of the pandemic month of April 2020, that’s the largest gap since Redfin began compiling the data in 2013.

The number of buyers and sellers was roughly in balance in February 2024, but buyers have steadily retreated from the market. Now, there are buyers’ markets in many areas of the country.

Redfin attributes the change to several factors. High home prices are enticing many owners to put their homes on the market. Also, fewer owners feel locked into their mortgages because of the gap between the interest rates on their mortgages and what they would pay on a new mortgage.

At the same time, economic uncertainty, higher mortgages rates and high prices are keeping many potential buyers out of the market.

Redfin says 31 of the top 50 metro areas are buyers’ markets.

Six of the 10 markets most favorable to buyers today are in Florida, according to Redfin. Sellers outnumber buyers by at least 3 to 1 in Miami, West Palm Beach and Fort Lauderdale.

The real estate brokerage also reported that the vacation home and second home mortgage market is particularly weak.

New mortgages on second homes in 2024 were at their lowest level since Redfin began collecting the data in 2018. Only 86,604 second home mortgages were closed in 2024, down 66% from the pandemic’s second-home buying spree in 2021 and 5% below 2023’s level.

The broker anticipates overall U.S. housing prices will decline 1% in 2025, with greater declines in some markets.

Why Central Banks Don’t Like Digital Currencies

Bitcoin and other digital currencies were created partly to provide a way to engage in transactions without using government-issued currencies.

Key concerns of central bankers are that digital currencies make it more difficult for them to interpret economic data and could make monetary policy less effective.

A recent study indicates the concerns are well-founded.

The study looked at stablecoins. These are not the speculative digital currencies. Stablecoins are backed by specific assets.

Two stablecoins that are backed by U.S. dollar assets, Tether and Circle, were the study’s focus. The stablecoins obtain this backing by buying primarily U.S. Treasury bills and money market instruments.

The study found that flows of money in and out of the stablecoins affect U.S. interest rates, and the effects aren’t uniform.

The Bank of International Settlements economists conducting the study found that sudden, higher inflows into the stablecoins caused interest rates on three-month treasury bills to fall within 10 days.

When flows out of the stablecoins increased, interest rates subsequently rose.

But the impact wasn’t symmetric. During periods of outflows, treasury interest rates increased two to three times as much as they fell during inflows.

As the amount of money in stablecoins increases, the researchers say it is reasonable to expect that the effects on treasury yields will be more significant.

The researchers say the main concern is that a run on stablecoins unrelated to the economy could cause a fire sale of treasury securities and a spike in interest rates that affects the economy and other markets.

Short-term treasury securities might become less of a safe haven if interest rates can be strongly influenced by transactions in stablecoins.

The Data

The ISM Manufacturing Index was 48.5 at the end of May, the lowest level since November 2024 and down from 48.7 at the end of April. May was the third consecutive month the index was below 50.0, indicating the manufacturing sector is contracting.

The ISM Services Index fell to 49.9 in May from 51.6 in April.

The PMI Services Index increased to 53.7 in May from 50.8 in April.

The PMI Manufacturing Index was 52.0 at the end of May. That’s down from 52.3 in mid-May but above 50.2 at the end of both April and March.

The PMI Composite Index for May was 53, a gain from 50.6 in April.

Personal income increased 0.8% in April, an improvement from the 0.7% increase in March.

Most of the increase was in government transfer payments. That’s likely the result of last year’s change in the Social Security law that gave retroactive benefits to some retired state and local government employees and their spouses.

Personal spending increased 0.2% in April after rising 0.7% in March. Spending on services increased 0.4% while spending on goods fell 0.1%.

The Personal Consumption Expenditure (PCE) Price Index rose 0.1% in April after being unchanged in March. Over 12 months, the PCE Price Index increased 2.1% through April and 2.3% through March.

The core PCE Price Index (which excludes food and housing expenses) rose 0.1% in both April and March. Over 12 months, the core PCE Price Index was 2.5% higher through April, down from the 2.7% increase through March.

The Consumer Sentiment Index from the University of Michigan was 52.2 at the end of May. That’s an improvement from 50.8 in mid-May and the same level as at the end of April.

The most recent low was 50.0 in June 2022. The most recent peaks were 74.0 in December 2024 and 79.4 in March 2024.

Pending home sales fell 6.3% in April after increasing 5.5% in March. Pending home sales in April were 2.5% lower than 12 months earlier, compared to being 0.6% lower in March.

Factory orders fell 3.7% in April, the first decline in five months, after rising 3.4% in March.

But most of the decline was in transportation. After excluding transportation orders, factory orders declined 0.5% in both April and March.

The second estimate of first-quarter GDP indicatede that it decreased at an annualized rate of 0.2%, an improvement from the 0.3% decline in the first estimate. The first quarter is the first time in three years that GDP fell.

In the GDP report, consumer spending increased at an annualized rate of 1.2%, the lowest rate since the second quarter of 2023.

The private sector generated 37,000 new jobs in May, the lowest since March 2023 and down from 60,000 in April.

The number of job openings increased to 7.391 million in April from 7.200 million in March, according to the JOLTS (Job Openings and Labor Turnover Survey) report.

There were only minor changes in the other categories in the report, such as hires, separations, quits, and layoffs.

New unemployment claims increased by 14,000 to 240,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.919 million from 1.893 million.

The Markets

The S&P 500 rose 0.84% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.51%. The Russell 2000 increased 0.64%. The All-Country World Index (excluding U.S. stocks) fell 0.17%. Emerging market equities declined 0.35%.

Long-term treasuries lost 0.47% for the week. Investment-grade bonds increased 0.26%. Treasury Inflation-Protected Securities (TIPS) fell 0.04%. High-yield bonds gained 0.35%.

In the currency sector, the U.S. dollar declined 0.29%.

Energy-based commodities increased 1.35%. Broader-based commodities rose 0.47%. Gold gained 1.48%.

Bob’s News & Updates

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