NEW YORK, March 15 (Reuters) - Diverging fortunes for

the massive technology and growth names that have propelled the

U.S. stock market higher are throwing a spotlight on their

pricey valuations.

The so-called "Magnificent Seven" are collectively trading

at an average of 33 times their expected earnings for the next

12 months, up from 26 at the end of 2022, according to LSEG

Datastream. That compares with a price-to-earnings ratio of

about 21 for the benchmark S&P 500 index, which has risen

over 7% this year.

Investors last year were happy to pay up for the megacaps,

given the companies' solid balance sheets and dominant positions

atop their industries. They have been more discriminating this

year, punishing the shares of Tesla and Apple ( AAPL )

when their outlooks turned murky while fueling dizzying gains in

Nvidia ( NVDA ).

"When you get to those kinds of valuations you have no room

for failure, no room for disappointment," said Mike Mullaney,

director of global markets research at Boston Partners.

Concerns about electric vehicle demand have sparked a near

35% drop in the shares of the former market darling Tesla this

year, making it the S&P 500's worst performer. The stock traded

at about 65 times forward earnings at the start of the year, and

is down to about 50.

Another Magnificent Seven member, Apple ( AAPL ), has ceded its perch

as the biggest U.S. company by market value to Microsoft ( MSFT )

after its shares declined 10% year-to-date, amid

pressure in its China business. The stock's P/E has fallen from

29 to 25.

Meanwhile, chipmaker Nvidia ( NVDA ), which trades at about

35 times earnings, has soared about 80% as it established a

dominant position in artificial intelligence applications. AI

optimism has also helped drive a nearly 40% gain in Meta

Platforms ( META ). The Facebook parent trades at 24 times

earnings.

By contrast, the Magnificent Seven last year advanced about

50% for Apple ( AAPL ) to over 230% for Nvidia ( NVDA ). Because of the stocks'

heavy weighting in the S&P 500, the group's performance

accounted for over 60% of the index's appreciation last year.

The S&P 500 rose 24% in 2023.

Markets are awaiting the coming week's Federal Reserve

policy meeting, which concludes on Wednesday. A strong economy

and sticky inflation have lowered investor expectations for how

much the central bank will cut rates this year, leading to a

rise in Treasury yields that could pressure stocks if it

continues.

Investors gauging whether Nvidia ( NVDA ) can parlay its massive lead

in AI computing into long-term dominance will be watching the

company's developer conference, set to kick off on Monday.

Though AI optimism has helped lift a swath of the

Magnificent Seven, many investors are grappling with how to

weigh the technology's potential in their valuation models.

"We are in a unique cycle here with AI, so we are struggling

to make sure we optimize the opportunity of this massive

transitional shift in technology," said Ken Laudan, portfolio

manager for the Buffalo Large Cap Fund, which holds the seven

stocks but is underweight them on a combined basis.

While robust earnings have supported the Magnificent Seven's

valuations, the group's growth trajectory is due to moderate

later this year or early next, said Jeffrey Buchbinder, chief

equity strategist for LPL Financial.

"At that point, markets may not want to pay double the P/E

for this group," said Buchbinder, pointing the Magnificent

Seven's trailing P/E of 41 versus 23 for the S&P 500.

Many investors remain sanguine regarding the Magnificent

Seven's valuations. Five of the seven are trading below their

five-year median P/E ratios, while the group is trading more

cheaply versus the market than a few years ago, JPMorgan

strategists said this week.

Nvidia's ( NVDA ) P/E has actually fallen from nearly 60 a year ago

as analysts increase their profit forecasts for the chipmaker.

"These are companies that are cranking out enormous amounts

of cash, very strong balance sheets, visible sources of revenue

growth," said Katie Nixon, chief investment officer for Northern

Trust Wealth Management.

But Apple ( AAPL ) and Tesla's shares have recently fallen below

their 200-day moving averages. Though the rest of the group are

above that mark, more of the Magnificent Seven dropping below

their trend lines could be a "warning sign" for the market,

Citigroup analysts said.

If the Magnificent Seven "start to go down ... absolutely

you could reverse a lot of the recent almost euphoric

sentiment," said Sameer Samana, senior global market strategist

at the Wells Fargo Investment Institute.