Max Kettner, Chief Multi-Asset Strategist at HSBC, sees hyperscalers returning to investor favor, characterizing the current market environment as a potential "melt-up." He suggests that investor fears regarding big tech and hyperscalers are overblown, particularly given their robust profitability. For example, the largest stocks in the S&P 500, including Nvidia, Apple, Microsoft, Amazon, Alphabet, Meta, Broadcom, Tesla, and Berkshire Hathaway, are collectively generating a return on equity of about 65%, a significant increase from 15% in 2017–2018. Kettner asserts that their valuations have become unusually attractive, with Amazon trading near its lowest price-to-earnings ratio in 20 years. He also noted that the "Magnificent Seven" hyperscalers trade at approximately 26 times earnings, which is surprisingly close to the Russell 2000's average of roughly 25 times earnings, despite nearly half of the Russell 2000 companies having negative earnings. This suggests investors may have overreacted during the recent selloff.
Kettner also stated that the stock market rally has strong fundamental support from robust first-quarter corporate results, particularly from technology megacaps. This strength has alleviated concerns about elevated Treasury yields, moving the market out of a "danger zone." He believes that the equity market's and broader risk asset complex's performance in recent weeks is "perfectly rational." HSBC recommends rotating out of high-beta momentum stocks and back into the Magnificent Seven, while also increasing exposure to sectors that could benefit from improving consumer strength, such as homebuilders, regional banks, transportation ETFs, and retail funds, due to anticipated large tax refunds.
Despite a recent divergence where chip stocks have soared while hyperscalers have lagged, Kettner remains "max bullish" on equities. JPMorgan echoed this sentiment, noting that a "major trigger" for the outperformance of chipmakers has been a spectacular revision in hyperscalers' 2026 spending plans, with AI capital expenditure expected to soar 100% year-over-year. Amazon, Alphabet, Meta, and Microsoft alone are projected to spend as much as $725 billion on capital expenditure this year, with their AI capex potentially exceeding the GDP of major economies like Japan by the end of the decade, according to Goldman Sachs projections. Kettner's stance suggests that the substantial investments in AI by these hyperscalers will ultimately drive their renewed favor.
