Where do Magnificent 7 valuations stand today?

The Magnificent 7 group of stocks has declined 9% month-to-date through August 5th, underperforming the broader market with the S&P 500 down 6% and the NASDAQ down 8%.

Within the group, Tesla (NASDAQ:TSLA) and Nvidia (NASDAQ:NVDA) were the relative underperformers, each falling 14% month-to-date, while Meta Platforms (NASDAQ:META) emerged as an outperformer.

According to Morgan Stanley (NYSE:MS) analysts, across the three most common valuation metrics - P/E, P/FCF, and EV/EBITDA - Mag 7 valuations are now 30% below their trailing five-year (T5Y) peak, 5% below their T5Y average, and 50-60% above their T5Y trough valuations.

This contrasts with the NASDAQ 100, which is 20% off its five-year high and 37% above its five-year low, and the Russell 2000, which is 56% off its five-year highs but 50% above its five-year low.

However, when adjusted for future growth prospects, the Magnificent 7 trades at a material discount to its T5Y valuation average, analysts highlight.

Forward earnings per share (EPS) growth is expected to accelerate compared to the trailing five years, with a 25% forward CAGR versus a 21% trailing CAGR. This implies a median Mag 7 forward PEG ratio of 0.8x, compared to a trailing PEG ratio of 1.3x.

"As a result, we'd conclude that while Mag 7 valuations still face significant downside valuation risk in a black swan or recession scenario, current Mag 7 valuations relative to future growth prospects are attractive after the recent drawdown," the analysts noted.

They note that the median PEG ratio is nearly 40% lower than the trailing five-year PEG ratio, which is an important distinction in a soft landing scenario and supports the potential for mega-caps to continue outperforming small caps.

Analysts also point out that Mag 7 consensus revenue revisions, excluding Nvidia and Tesla, are up 2% over the last 12 months, while EPS revisions have increased by 16-21%.

That indicates that 2024 results and guidance have slightly exceeded expectations, and 2025 expectations are on the rise. Moreover, Mag 7 is benefiting from operational efficiencies more than small caps, supporting the market's preference for quality and defensibility in this group.