The Magnificent 7 growth slowdown
The Magnificent 7
It’s officially earnings season for the Magnificent 7. We will see earnings for Alphabet and Tesla tomorrow, Amazon on Thursday, and Meta, Apple and Microsoft next week. To say it will be a big deal to the market is an understatement. The market’s three-month recovery has been driven by Big Tech:
From a market cap perspective, the Mag 7 is now 31 per cent of the S&P 500, also near an all-time high:
As Jason Pride at Glenmede points out, earnings growth should be strong this quarter — but not exceptionally strong. Big Tech’s annual earnings growth results have been flat or slowing for the past few quarters, and are expected to slow further in 2025 and 2026. We exclude Nvidia from the graph below, since its earnings growth in 2023 and early 2024 is too off the chart, but it has a similar pattern; we also excluded Tesla, as its earnings are all over the place and a clear outlier:
For the market and these companies, this is potentially a bad sign: over the past two years, investors have often punished Mag 7 stocks for earnings results that were great, rather than astounding. A further growth slowdown does not bode well. Here, for example, is Microsoft’s performance last year; we’ve called out how much the quarterly EPS in each release overshot Wall Street’s estimate. The stock only perked up with an 8 per cent beat, and fell on the rest:
In such an expensive market, it is completely fair to expect a lot from the priciest stocks. And, as Dec Mullarkey at SLC Capital Management astutely points out, part of the earnings growth slowdown is from normalisation to an increasingly high annual base.
Even so, Bank of America predicts the Magnificent 7 is only expected to keep its earnings growth edge over the rest of the S&P 500 for another 18 months:
That deceleration is concerning, especially for this year. But 18 months is still a long runway. And, thankfully, this is a two-sided story: the market expects a slowdown in earnings growth for the Magnificent 7 and a pick-up in earnings growth for the S&P 493. The Magnificent 7 should continue to grow in the low teens and may accelerate again in 2027, while the rest of the market will hopefully catch up. “[There is] a constructive aspect to this market,” said Kevin Gordon at Charles Schwab. “The last time the Magnificent 7 decelerated, the rest decelerated too, setting up the bear market of 2022. As long as breadth continues, we could get the best of both worlds.”
A broader market, if we get it, will be an unvarnished good, so long as the big companies can continue to hold up the S&P 500 until then. Slowing earnings growth, and the high potential for bad guidance on tariffs and capex, will be a challenge.