Are the "Magnificent 7" fundamentals as solid as a rock? Are they still the "main force" leading the US stock market to new heights?

After years of pursuing performance growth at all costs, the tech giants in the US stock market have begun to fully emulate the practices of traditional value-based companies - paying dividends and increasing stock buyback sizes. These tech giants continue to enhance their cash payment capabilities within the scope allowed by free cash flow, and this shift towards a dividend-paying and increased buyback style can be seen as strong evidence of their incredibly robust financial strength. Therefore, from a strong fundamental perspective, the stock price increases led by "Magnificent 7" tech giants such as Nvidia and Microsoft may continue to be the core driving force leading the US stock market to new heights in 2024, following the trend set in 2023.

It is worth noting that this year, several US tech companies have introduced quarterly dividend plans for the first time. Although the dividend yield is not high, the news of dividends and buybacks continues to trigger significant gains in the US stock market. This is mainly because investors view this move as an important force supporting the bullish momentum of the US stock market - that is, tech companies can continue to provide strong cash flow and solid fundamental signals.

Alphabet Inc. (GOOGL.US), the parent company of Google, announced last month its first dividend, stating that it will pay a dividend of 20 cents per share and increase its stock buyback to $70 billion, driving the stock price of this Google parent company up by 10%, with a current market value close to $2.1 trillion.

Earlier in February this year, Meta Platforms (META.US), the parent company of Facebook and Instagram, announced its first dividend, stating a dividend of 50 cents per share, and announced an additional $50 billion stock buyback, leading to a historic surge in the company's stock price. In addition, tech companies such as Salesforce Inc. (CRM.US) and Booking Holdings Inc. (BKNG.US) also announced dividends this year.

Mark Iong, a stock fund manager at investment firm Homestead Advisers, stated: "Dividends will be the bargaining chip for large tech companies in the future." "I believe that if you choose not to pay dividends, it will now be seen as a sign of even more unstable business fundamentals."

The Fundamental Strength of the "Magnificent 7" is "Rock-Solid"

In most classic cases, new dividends are accompanied by large-scale stock buybacks, indicating that as generative AI technology becomes a new driving force for their performance growth, companies are choosing to refocus on shareholder return levels. Analysts expect that **this classic combination will continue to support the stock price increases of the "Magnificent 7" tech giants, which hold significant weight in the S&P 500 index, thereby driving the rise of the US stock marketThe "Magnificent 7" includes: Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms. Global investors have been flocking to these seven tech giants since the first quarter of 2023 and 2024, mainly because they are all betting on the best position to expand revenue through the use of artificial intelligence technology due to their huge market size and financial strength.

While distributing dividends and increasing buybacks, the "Magnificent 7" continues to cut costs to improve profits, making their fundamentals extremely solid. "What excites investors is that they are distributing dividends and buying back stocks at the same time, cutting costs, and achieving growth, which is accelerating their pace of profit growth," said Mark Iong, stock fund manager at Homestead Advisers.

Currently, among the so-called "Magnificent 7" in the US stock market, only Amazon (AMZN.US) and Tesla (TSLA.US) have not yet paid dividends, but their net profit indicators remain quite stable, reflecting strong fundamentals. "It's hard for Amazon not to follow suit," Long said.

A spokesperson for Amazon mentioned the company's recent earnings conference call in an interview. During the call, Amazon's CFO Brian Olsavsky stated that the company's focus is on capital expenditures and debt repayment, not shareholder returns. Tesla, on the other hand, stated on its website that it does not expect to pay any cash dividends in the foreseeable future.

AI chip leader Nvidia (NVDA.US) has a quarterly dividend yield of only 4 cents per share, which is 0.02%, and has not been raised since 2018. The chip designer generated as much as $28 billion in cash last year, but returned less than $400 million in dividends to investors, although stock buybacks amounted to $9.5 billion. The average expectation of Wall Street analysts compiled by institutions shows that Nvidia's operating cash flow is expected to more than double this year, reaching $58 billion.

Meta, the parent company of Facebook, has seen its stock price rise by about 35% this year, while Alphabet, the parent company of Google, has risen by about 21%. Both have outperformed the Nasdaq 100 index, which has risen by as much as 7.9%.

High free cash flow and a solid balance sheet are the core factors that make large tech companies popular among Wall Street and global investors. According to Wall Street analysts' expectations, the top six US tech giants are expected to generate over $416 billion in free cash flow this year.

Stock buybacks remain popular on Wall Street, and tech giants are moving towards dividends

Nevertheless, stock buybacks—reducing the number of shares to support earnings per share benchmarks—remain the preferred way for these tech companies to return funds to shareholders and are still highly favored by Wall Street investment institutions. Stock prices often experience an upward trend after announcing buyback news.According to data compiled by institutional sources, the "Magnificent 7" tech giants in the US have spent nearly $58.5 billion on stock buybacks this year, while funds allocated for dividends are less than $11 billion.

For example, Meta's dividend comes with a buyback of up to $50 billion, while Alphabet's dividend is accompanied by a $70 billion buyback. Apple, which started paying dividends over a decade ago, announced the largest stock buyback in US stock market history last week: $110 billion, surpassing the previous record of $100 billion set in 2018.

Daniel Peris, Senior Portfolio Manager at Federated Hermes, stated: "These companies still prefer stock buybacks, with dividend yields not being high, but I believe that these companies are moving towards dividend distribution, which can explain a lot." Peris has written several books on dividend investing.

"As a dividend strategy investor, it is a very good sign when a company with a mature performance model announces dividends, but it only has a very positive meaning when the yield continues to accumulate, and we have not reached that level yet," Peris said.

Due to high expenses such as research and development projects, dividend payments by tech companies tend to be relatively small, with both Meta and Alphabet having dividend yield indicators below 0.5%, and Apple's dividend yield slightly higher. In comparison, the overall dividend yield of the S&P 500 index once reached 1.37%.

Dividends are to some extent meant to encourage long-term stock holding, and over time, this impact will gradually become greater. Microsoft's dividend yield is around 0.7%, but it is continuously accumulating. In the past 20 years, Microsoft's stock price has risen by about 1500%. However, including dividends, the increase can reach an astonishing 2400%.

With the leadership of the "Magnificent 7", US stocks are expected to continue hitting new historical highs

Michael Hartnett, a strategist at Bank of America known as "Wall Street's most accurate strategist," recently pointed out that before actual interest rates rise and concerns about economic recession, the US stock market may continue to rely on a few large stocks to guide the market direction.

Strategist Hartnett noted that US tech giants are expected to continue leading US stocks to repeatedly hit new highs, meaning that the US stock market will continue to rely on these seven tech giants with high weightings to determine the market direction, until the real yield on 10-year Treasury bonds rises to around 3%, or until higher yields combined with larger credit spreads pose a threat to economic recessionRenowned Wall Street investment firm Wedbush stated that the profit environment for US tech giants still looks strong, especially considering the enthusiasm of businesses and consumers for artificial intelligence, which has driven the soaring trend of tech stocks over the past year. Wedbush indicated that extensive on-site research has given the firm great confidence in corporate AI spending, with AI spending expected to account for approximately 10% of enterprise IT budgets this year, compared to less than 1% in 2023.

Wedbush also mentioned that a strong US earnings season may be a major positive catalyst for tech stocks in the near term, and the firm predicts that by the end of 2024, the Nasdaq 100 index, which includes many US tech stocks, is expected to continuously set new historical highs.

Goldman Sachs' strategy team stated that the seven tech giants accounted for 11% of the total sales of the S&P 500 index in 2023, and 18% of the total profits. The firm also expects the seven tech giants to increase their earnings per share (EPS) by at least 20% in 2024, making them a significant contributor to the overall EPS of the S&P 500 index. Looking at the compound annual growth rate (CAGR), from 2013 to 2019, the overall sales CAGR of the "seven tech giants" was as high as 15%, while other stocks had a CAGR of 2%. This gap narrowed in 2021 to 2022, but Goldman Sachs strategists predict that from 2023 to 2025, the overall sales CAGR of the "seven tech giants" will reach 11%, compared to a 3% CAGR for other components of the S&P 500 index.

Regarding the future market trends of the S&P 500 index, Wall Street investment firms generally hold an optimistic view, expecting that even if the Federal Reserve does not announce interest rate cuts this year, the index is likely to continue setting new historical highs under the strong performance indicators and upward momentum of tech giants.

Tom Lee, co-founder and head of research at Fundstrat Global Advisors, known as the "Wall Street Oracle," recently predicted that the S&P 500 index is expected to reach 5700 points this year (as of the Friday close, the index closed at 5222.68), ranking as the most optimistic S&P 500 index expectation on Wall Street, surpassing the bullish expectations of Bernstein, Wells Fargo, and Oppenheimer, who gave a target of 5500 points. Lee was one of the few on Wall Street who successfully predicted the bullish trend of the S&P 500 index in the second half of last year, and he accurately forecasted the upward trend of US stocks in 2023 at the end of 2022