As the latest earnings season nears its conclusion, a notable shift has emerged in the financial landscape of Corporate America. After several quarters of domination by the so-called “Magnificent Seven”. The seven largest technology companies—a broader recovery is finally taking shape. According to data compiled by Bloomberg Intelligence, profit growth is expected for the rest of the S&P 500 Index. Excluding these tech giants, marking the first time since the fourth quarter of 2022 that other companies are showing positive earnings growth.
Keith Lerner, co-chief investment officer at Truist Advisory Services, commented on this trend, noting. “This broader earnings strength is a positive as it provides portfolio managers more opportunities beyond just a few stocks and provides a more balanced market.”
Economic Indicators and Key Earnings Reports
While over 80% of S&P 500 companies have reported their earnings, a few major players that could provide critical insights into the state of the U.S. economy, such as Home Depot Inc., Walmart Inc., and Target Corp., have yet to release their results. These reports are highly anticipated as traders remain cautious about a potential economic slowdown. In addition, Nvidia Corp., a central figure in the artificial intelligence (AI) sector, is scheduled to report later this month, which could further influence market sentiment.
The Broadening Earnings Landscape
The significant takeaway from this earnings season is the gradual shift away from large-cap technology companies, as smaller and previously underperforming companies begin to make their mark. Bloomberg Intelligence data reveals that earnings for S&P 500 companies, excluding the Magnificent Seven, are set to grow by 7.4% in the second quarter compared to the previous year. This recovery comes after five consecutive quarters of declining earnings.
While the large-cap tech companies are still seeing profit growth, with a projected 35% increase, this represents a slowdown from the rapid gains seen in the past year. The shift towards smaller companies and market laggards is gaining traction, especially after a cooler-than-expected inflation report in July sparked a rotation away from large-cap stocks.
AI Frenzy Cools Down
Despite the excitement surrounding artificial intelligence, the earnings results from major AI players have been underwhelming. Companies like Amazon.com, Microsoft, and Alphabet have fallen short of expectations, either missing forecasts or providing vague outlooks. This has raised concerns about the immediate returns on the substantial investments being poured into AI.
Michael Casper, a strategist at Bloomberg Intelligence, highlighted the potential risks, saying.“The risk is that because there hasn’t been that boost to revenues, companies are getting a little antsy and might cut back on AI projects (or) spending. Especially if the economy is weakening and they’ve got to keep margins up. AI spend will be the first thing to get curbed because it generates little revenue.”
Not all companies have faltered, though. Meta Platforms, the parent company of Facebook, reported strong AI-driven revenue growth, beating expectations for the second quarter. Similarly, Apple indicated that new AI features would help drive iPhone upgrades in the coming months.
Savita Subramanian, equity and quant strategist at Bank of America, summarized the situation, stating, “AI hype days are over. Now it’s a ‘show me’ story.”
Revenue Misses and Future Outlook
While earnings have been relatively strong, revenue misses have become more frequent this season, drawing the attention of market analysts. According to Bloomberg Intelligence, 21% of companies reported revenue below estimates, slightly higher than the 20% from a year ago. Truist’s Lerner observed, “The overall earnings beat rates are running close to the long-term average, but the revenue beat rate is below average. Thus, companies are pulling other levers, such as on the expense side, to meet their numbers.”
Despite these challenges, there is optimism for the future. Executives have expressed positive outlooks for upcoming earnings, with Bloomberg Intelligence data indicating a favorable trend for the third quarter. Additionally, Bank of America data suggests that analysts’ estimates for 2024 and 2025 remain stable, reflecting confidence in future growth.
Market Reactions and Stock Volatility
This earnings season has been marked by significant volatility in stock prices. With strong reactions to both positive and negative news. Data from Citi shows that the average S&P 500 company has seen its stock move by 4.9%. In either direction on the day of earnings announcements, well above the historical average of 3.3%. These earnings-day moves, in just one direction, have also been the most pronounced in 12 years.
In conclusion, as the AI frenzy begins to cool, the broader market is starting to show signs of recovery. This shift provides investors with new opportunities beyond the N, and the positive outlook for future earnings suggests that this trend may continue.
Keywords: Broader market recovery, AI earnings slowdown, S&P 500 earnings growth
