This article first appeared on GuruFocus.
J.P. Morgan says the Magnificent Seven’s painful valuation resetmay be largely complete, potentially removing one of the biggest headwinds that has weighed on mega-cap technology stocks.
Equity strategists led by Mislav Matejka said the group’s 12-month forward price-to-earnings multiple relative to the broader market has fallen to around one standard deviation below its historical median and now sits at a 10-year low.
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That is a striking reversal for Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Meta Platforms (NASDAQ:META) and Tesla (NASDAQ:TSLA), which have historically commanded substantial valuation premiums because of their scale and growth.
J.P. Morgan said the Magnificent Seven have been de-rating alongside the broader technology sector, but the adjustment has now largely run its course.
The bank had already argued in March that the selloff in valuation multiples may have become excessive.
That does not mean J.P. Morgan believes the entire compression was unwarranted.
The strategists said some reduction in valuation multiples makes sense because the economics of several mega-cap technology companies are changing. AI infrastructure spending is driving capital expenditures sharply higher, contributing to greater leverage and weaker free-cash-flow profiles.
That matters because investors historically rewarded these businesses partly for their extraordinary cash generation and capital-light economics.
Still, J.P. Morgan believes a substantial portion of that adjustment is already reflected in valuations.
Investor takeaway
The important distinction is that J.P. Morgan is not necessarily saying the Magnificent Seven are cheap in absolute terms.
Its argument is that their valuation premium relative to the rest of the market has already compressed unusually far.
From here, earnings could matter more.
Continued strength from hyperscalers could support the group even as enormous AI investments pressure free cash flow. Further multiple compression remains possible, but J.P. Morgan believes much of the valuation reset investors have been waiting for may already have happened.
That shifts the next debate from how far multiples can fall to whether earnings growth can justify what remains.
