Dan Niles reveals favourite ‘Magnificent Seven' stocks for the earnings season

Dan Niles of Niles Investment Management, while expressing caution regarding significant upside for the 'Magnificent Seven' due to high valuations, favors Microsoft and Nvidia heading into earnings season. He highlights Microsoft's Azure rebound and strengthened OpenAI partnership as key drivers, alongside Nvidia's sustainable growth from AI inference workloads and surging CAPEX spending, positioning both companies for continued strength despite elevated expectations.

Analysis

Dan Niles of Niles Investment Management expresses selective optimism for the 'Magnificent Seven' this earnings season, cautioning that lofty valuations and stretched positioning may mute share price reactions even to strong results, as exemplified by Alphabet and Netflix. Despite this broader market concern, Microsoft (MSFT) is identified as a top pick, supported by tangible fundamental improvements. Specifically, its Azure cloud business demonstrated a significant turnaround, reaccelerating to grow 2% faster in the March quarter than in December after a period of disappointment. This rebound, coupled with the strategic OpenAI partnership via the Stargate deal, is expected to drive continued momentum. The analysis suggests that while expectations for MSFT are elevated, they are not excessive, and a 0.65% dividend yield provides additional support for long-term holders. Similarly, Nvidia (NVDA) is recommended based on a sustainable growth narrative shifting from AI model training to inference workloads, which is attracting surging CAPEX and creating a durable revenue stream. The outlook is further bolstered by signs of China re-engaging with Nvidia's models, mitigating prior geopolitical concerns and reinforcing its unmatched position within the AI ecosystem.

Key Decisions for Investors

• Investors should be aware that even strong earnings from 'Magnificent Seven' stocks may not lead to significant share price appreciation due to already high valuations, as seen with Alphabet and Netflix.
• Consider overweighting or initiating positions in Microsoft (MSFT) ahead of earnings, given the reacceleration in Azure growth and the strategic benefits from its OpenAI partnership.
• For long-term AI exposure, Nvidia (NVDA) remains a core holding, with its growth narrative supported by a durable demand shift towards inference workloads and increasing CAPEX.
• Monitor upcoming earnings calls for confirmation of Azure's growth trajectory and for commentary on inference-related demand to validate these investment theses.