Will Mag 7 Earnings Meet Expectations?

Read MoreHide Full Article

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

For the 134 S&P 500 companies that have reported Q2 results, or 26.8% of the index’s total membership, total earnings are up +7.6% from the same period last year on +4.7% higher revenues, with 81.3% beating EPS estimates and 57.5% beating revenue estimates.

Except for the revenue beats percentage, which at 57.5% is the lowest for this group of 134 index members over the preceding 20-quarter period, all of the other performance metrics are tracking better relative to what we have seen in other recent periods.

Looking at Q2 as a whole, total earnings for the index are expected to be up +9.6% from the same period last year on +4.9% higher revenues. This will be the highest earnings growth pace since the +10% earnings growth in the first quarter of 2022.

Q2 earnings for the ‘Magnificent 7’ companies are expected to be up +26.6% from the same period last year on +13.6% higher revenues. Excluding the ‘Mag 7’, Q2 earnings growth for the rest of the index drops to +6.1% (from +9.6%).

Alphabet (GOOGL - Free Report) and Tesla (TSLA - Free Report) kicked off the Q2 reporting cycle for the ‘Magnificent 7’ stocks, with the market unimpressed with either of the two reports. This contrasted with the companies’ Q1 releases when both Alphabet and Tesla were up big on the quarterly results.

There is no surprise in the Tesla sell-off, as the company not only missed estimates but also had nothing good to say about the near-term outlook. The EV maker has been suffering competitive challenges in its core market, prompting it to cut prices that are weighing on its margins. As a result, Tesla’s Q2 earnings were down -45.3% on +2.3% higher revenues. Given Tesla shares’ gain of more than +40% in the three-month period ahead of the quarterly release, the post-release sell-off makes perfect sense.

The sell-off in Alphabet shares is far harder to understand, as the search giant handily beat estimates and showed broadly positive trends in all of its businesses.

The issue in the Alphabet report appears to be the market’s disappointment with a bigger-than-expected capital spending level in the period of $13.2 billion relative to expectations of $12.2 billion. Management also indicated that they saw underspending as a bigger risk at this stage of the AI rollout than the alternative, which was interpreted as indicative of an elevated capex spend trend than what investors had been factoring in.

We don’t see elevated capex by Alphabet or any other Tech operator as a negative, but this appears to be the case with Tech investors at this stage. Perhaps the market would like to see a tangible path toward monetization for all the AI-centric investments in which Alphabet and its peers are currently engaged in. This also means that capex spending levels in the coming Meta and Microsoft reports will similarly receive close scrutiny.

For the Mag 7 group as a whole, Q2 earnings are expected to be up +26.6% on +13.6% higher revenues, as the chart below shows.