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In Q1-24, ‘Magnificent 7’ Tech earnings were up a remarkable +51.2%, on +14.0% higher revenues.
Exclude that ‘Mag 7’ contribution?
Q1-24 earnings for the remainder of the S&P50 index showed a poor-1.5% from the year-earlier period (versus +6.8% growth otherwise).
According to Zacks research, done on May 31st, 2024, the very same Tech sector is expected to remain in a strong leading position -- in Q2-24.
Read on.
II. Tech Mega-cap Earnings Carry the Load
In Q2-24, Zacks expects total earnings for the Tech sector to be up +14.4%, on +9.3% higher revenues. What drives it? Keep internal Info Tech sector profit margins in mind:
Info Tech sector profit margins were 25.9% in Q1-24
The S&P500 profit margin was 11.7% in Q1-24
Info Tech margins are more than double the average S&P500 sector
Image Source: Zacks Investment Research
Zacks latest Q2 EPS rise gets paired with a nice quarterly 102 basis point lift from Tech net profit margins too.
Tech’s scalable profit margins — over double the average S&P500 profit margin — is the ‘secret sauce’ to U.S. large-cap index share outperformance.
Regardless, a strong mega-cap P/E valuation bias is incorporated in the S&P500 and the Nasdaq.
Their market capitalizations (led by MSFT at $3.2T and AAPL at $2.9T) are extraordinary.
Over the last 10 full years? Four mega-cap tech stocks drove the U.S. large cap indexes (AAPL, MSFT, GOOGL and AMZN).
Tesla and NVIDIA? They are relatively newer entrants to this class of mega-cap stocks.
Image Source: Zacks Investment Research
2023? Meta caught up.
2024? Nvidia leads the way. Tesla is the new laggard.
This so-called Magnificent Seven (Amazon, Apple, Google (Alphabet), Meta, Microsoft, Nvidia and Tesla) make up more than a quarter of the S&P500.
Their stellar performance has driven the U.S. stock market's outperformance, so far this year.
For the bulls, the COVID pandemic accelerated online shopping and remote working. These aggregate demand factors were already in place before 2020.
In 2024, e-commerce spending continues to rise, as a percentage of U.S. retail spending, but only at the long-term trend growth rate.
For the bears, be aware.
The Biden administration and the E.U. announced anti-competition litigation.
III. The Zacks June 2024 Sector/Industry/Company Telescope
The May 31st, 2024 Zacks Industry Ranks showed a more modest cyclical set-up.
Again, I could not find any Unattractive or Very Unattractive Sector groups, after the all of the Q1-24 EPS reports came in.
There were two Very Attractive sectors: Info Tech and Industrials.
There was one Attractive sector: Materials.
Zacks Industry Ranks showed a large slug of seven Market Weight sectors: Consumer Disc., Consumer Staples, Financials, Health Care, Energy, Communication Services and Utilities.
(1) Info Tech stayed Very Attractive. Semis & Computer Software Services led.
(4) Consumer Discretionary was a Market Weight. Publishing and Media was strong. Non-food Retail/Wholesale looked good, too.
(5) Consumer Staples was a Market Weight. Soaps & Cosmetics, and Food/Drug Retail were the strongest groups.
(6) Financials fell to Market Weight from Attractive. Investment Banking & Brokering looked best.
(7) Energy fell to Market Weight from Attractive. Oil & Gas Integrated, Oil/Gas Pipelines, Oil & Gas Integrated, and Energy-Alternates looked the best.
(8) Health Care stayed at Market Weight. Medical Products and Drugs looked best.
(9) Utilities fell to Market Weight from Attractive. Utilities – Electric Power looked the best.
(10) Communications Services fell to Market Weight from Attractive. Telco Equipment stayed very strong, though.
IV. Conclusion
With only two Very Attractive sectors — Info Tech and Industrials — it should be no surprise that this stock market trades so narrowly, lifted by the very largest stocks.
Each cycle has unique characteristics.
This one has two:
First, there is an “AI” cap-ex boom. This is funded by super-strong earning growth, centered within massive Tech mega-cap stocks.
Second, an infrastructure Industrial spending boom, funded by the U.S. Federal government.
Enjoy the rest of the June 2024 Zacks strategy report!
Warm Regards,
John Blank, PhD Zacks Chief Equity Strategist and Economist
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Strong Mega-Cap Profit Center in the S&P: Zacks JUNE 2024 Strategy
The following is an excerpt from Zacks Chief Strategist John Blank’s full Jun Market Strategy report To access the full PDF, click here.
I. Intro: The Latest Zacks Earnings Forecast
In Q1-24, ‘Magnificent 7’ Tech earnings were up a remarkable +51.2%, on +14.0% higher revenues.
Exclude that ‘Mag 7’ contribution?
Q1-24 earnings for the remainder of the S&P50 index showed a poor-1.5% from the year-earlier period (versus +6.8% growth otherwise).
According to Zacks research, done on May 31st, 2024, the very same Tech sector is expected to remain in a strong leading position -- in Q2-24.
Read on.
II. Tech Mega-cap Earnings Carry the Load
In Q2-24, Zacks expects total earnings for the Tech sector to be up +14.4%, on +9.3% higher revenues. What drives it? Keep internal Info Tech sector profit margins in mind:
Image Source: Zacks Investment Research
Zacks latest Q2 EPS rise gets paired with a nice quarterly 102 basis point lift from Tech net profit margins too.
Tech’s scalable profit margins — over double the average S&P500 profit margin — is the ‘secret sauce’ to U.S. large-cap index share outperformance.
What of the Tech mega-caps, going forward?
Since the start of the COVID era in March 2020, Apple ((AAPL - Free Report) ), Microsoft ((MSFT - Free Report) ), Alphabet ((GOOGL - Free Report) ), Amazon ((AMZN - Free Report) ), NVIDIA ((NVDA - Free Report) ), Meta Platforms ((META - Free Report) ) and Telsa ((TSLA - Free Report) ) have been leading.
Regardless, a strong mega-cap P/E valuation bias is incorporated in the S&P500 and the Nasdaq.
Their market capitalizations (led by MSFT at $3.2T and AAPL at $2.9T) are extraordinary.
Over the last 10 full years? Four mega-cap tech stocks drove the U.S. large cap indexes (AAPL, MSFT, GOOGL and AMZN).
Tesla and NVIDIA? They are relatively newer entrants to this class of mega-cap stocks.
Image Source: Zacks Investment Research
2023? Meta caught up.
2024? Nvidia leads the way. Tesla is the new laggard.
This so-called Magnificent Seven (Amazon, Apple, Google (Alphabet), Meta, Microsoft, Nvidia and Tesla) make up more than a quarter of the S&P500.
Their stellar performance has driven the U.S. stock market's outperformance, so far this year.
For the bulls, the COVID pandemic accelerated online shopping and remote working. These aggregate demand factors were already in place before 2020.
In 2024, e-commerce spending continues to rise, as a percentage of U.S. retail spending, but only at the long-term trend growth rate.
For the bears, be aware.
The Biden administration and the E.U. announced anti-competition litigation.
III. The Zacks June 2024 Sector/Industry/Company Telescope
The May 31st, 2024 Zacks Industry Ranks showed a more modest cyclical set-up.
Again, I could not find any Unattractive or Very Unattractive Sector groups, after the all of the Q1-24 EPS reports came in.
There were two Very Attractive sectors: Info Tech and Industrials.
There was one Attractive sector: Materials.
Zacks Industry Ranks showed a large slug of seven Market Weight sectors: Consumer Disc., Consumer Staples, Financials, Health Care, Energy, Communication Services and Utilities.
(1) Info Tech stayed Very Attractive. Semis & Computer Software Services led.
Zacks #1 Rank (STRONG BUY): Nvidia ((NVDA - Free Report) )
(2) Industrials stayed Very Attractive. Business Products, Pollution Control, Industrial Products-Services, and Conglomerates, all looked strong.
Zacks #1 Rank (STRONG BUY): GE Aerospace ((GE - Free Report) )
(3) Materials fell to an Attractive rating from Very Attractive. Paper and Metals-Non-ferrous were notably strong.
Zacks #1 Rank (STRONG BUY): Southern Copper ((SCCO - Free Report) )
(4) Consumer Discretionary was a Market Weight. Publishing and Media was strong. Non-food Retail/Wholesale looked good, too.
(5) Consumer Staples was a Market Weight. Soaps & Cosmetics, and Food/Drug Retail were the strongest groups.
(6) Financials fell to Market Weight from Attractive. Investment Banking & Brokering looked best.
(7) Energy fell to Market Weight from Attractive. Oil & Gas Integrated, Oil/Gas Pipelines, Oil & Gas Integrated, and Energy-Alternates looked the best.
(8) Health Care stayed at Market Weight. Medical Products and Drugs looked best.
(9) Utilities fell to Market Weight from Attractive. Utilities – Electric Power looked the best.
(10) Communications Services fell to Market Weight from Attractive. Telco Equipment stayed very strong, though.
IV. Conclusion
With only two Very Attractive sectors — Info Tech and Industrials — it should be no surprise that this stock market trades so narrowly, lifted by the very largest stocks.
Each cycle has unique characteristics.
This one has two:
First, there is an “AI” cap-ex boom. This is funded by super-strong earning growth, centered within massive Tech mega-cap stocks.
Second, an infrastructure Industrial spending boom, funded by the U.S. Federal government.
Enjoy the rest of the June 2024 Zacks strategy report!
Warm Regards,
John Blank, PhD
Zacks Chief Equity Strategist and Economist