Has the Bottom Been Reached? Cathay Securities: Valuations of US Tech Magnificent Seven Near 10-Year Lows

Cathay Securities released its July investment outlook today (8th), expressing optimism about the AI-driven rally supporting US equities and emphasizing that the current valuations of the 'Magnificent Seven' (Mag-7) US tech giants are nearing 10-year lows, offering relative investment appeal. The firm also recommends diversifying portfolios into Japanese equities and high-rated bonds to capture structural opportunities.

Cathay Securities believes the global market has entered a new phase marked by high interest rates, inflation, and geopolitical risks. Amid this environment, where interest rate volatility may intensify, AI development remains the primary support for US equities.

The 'Magnificent Seven' refers to seven influential large-cap tech companies: Microsoft, Apple, NVIDIA, Alphabet (Google's parent), Amazon, Meta (Facebook's parent), and Tesla. These companies continue to show positive earnings forecast revisions. Recent market volatility stems largely from high market concentration, technical corrections, and IPO-related anxiety—not from fundamental deterioration. With current valuations nearing decade-low levels, the Mag-7 remain relatively attractive.

However, if the Federal Reserve maintains high interest rates for an extended period in the second half of the year, high-quality growth stocks, large-cap stocks, and tech stocks will remain dominant. Traditional industries and small-to-mid-sized enterprises that benefit less from AI may continue to face challenges from high interest rates, high wages, and high inflation. Investors may consider allocating to energy stocks as a hedge.

On Japanese equities, Cathay Securities sees structural strengths driven by corporate earnings, positive earnings guidance, and policy reforms. The financial, consumer, industrial, and technology sectors remain particularly noteworthy.

Recent performance in Japanese stocks, especially bank stocks benefiting from rising interest rates, is suitable for medium- to long-term investors. For those seeking stable, long-term value, large healthcare, consumer, and industrial sectors are worth monitoring.

Regarding bond markets, US investment-grade bonds offer allocation value, supported by higher yields, resilient global economic conditions, and underlying demand.

Cathay Securities notes that while Bank of America views credit spreads as relatively narrow, its baseline outlook on US investment-grade bonds remains constructive, expecting credit spreads to gradually narrow in the second half of the year.

Additionally, confidence in international capital flows may take time to recover due to ongoing geopolitical tensions, including those between the US and Iran.