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Of the six members of ‘The Magnificent 7’ group that have already reported June-quarter results, the market was disappointed with Tesla (TSLA - Free Report) , Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) , and Amazon (AMZN - Free Report) . Conversely, it was okay with Apple’s (AAPL - Free Report) quarterly release and loved Meta’s (META - Free Report) results.
This is clearly not a good picture and likely suggestive of tougher times ahead for the group. Some in the market are likely thinking the Mag 7 leadership of the market is likely behind us.
I will push back on parts of this narrative, as most of the Mag 7 stocks provide some of the most sustainable growth performance in the entire market.
Aside from Apple, which is likely no longer a growth company, and Tesla, which is dealing with a combination of competitive pressures and a cyclical downturn in its core market, the other five are not only generating impressive top- and bottom-line growth today, but the trend is expected to remain in place at least through next year, if not beyond.
Take the case of Amazon, which modestly missed the Zacks Consensus revenue estimate. Amazon’s Q2 earnings almost doubled from the year-earlier level (up +99.8%) to $13.16 billion on +10.1% higher revenues to roughly $148 billion.
Alphabet beat on the top and bottom lines, with its Q2 earnings up +28.6% to $23.6 billion on +15% higher revenues to $71.4 billion. Microsoft also beat on the top- and bottom lines, coming out with Q2 earnings that increased +9.7% to $22 billion on +15.2% higher revenues to $56.2 billion.
So why is everyone so glum if these companies are bringing in so much in revenues and earnings?
The answer to that question lies in what these companies are doing to prepare for the artificial intelligence (AI) world. Each one is heavily investing in building out the AI infrastructure; the amounts involved are huge and bigger than what many in the markets had been expecting. And that is the primary reason why investors are so glum; they feel that these companies haven’t provided a good-enough explanation of how these huge investments will be monetized.
We noted in this space last week the comment from Alphabet's CEO, who said that underinvestment in the AI opportunity represented a bigger risk at this stage than the alternative.
We have no reason to think that these otherwise very well-run companies are throwing good money on questionable projects. As such, we like these companies investing in their future, which will ensure their importance and leadership status in the AI-centric future world. In other words, we think the market’s capex fixation is overdone.
Take a look at the chart below that shows current consensus expectations for the ‘Mag 7’ stocks as a whole for the current and coming periods in the context of what they were able to achieve in the preceding period. The +33.5% earnings growth is comprised of actual results from the six group members that have reported and estimates for Nvidia (which reports on August 28th).
Image Source: Zacks Investment Research
The chart below that shows the group’s earnings and revenue growth on an annual basis.
Image Source: Zacks Investment Research
Beyond these Mag 7 players, total Q2 earnings for the Technology sector as a whole are expected to be up +20.3% from the same period last year on +10.1% higher revenues.
The chart below shows the sector’s Q2 earnings and revenue growth expectations in the context of where growth has been in recent quarters and what is expected in the coming four periods.
Image Source: Zacks Investment Research
The chart below shows the sector’s growth picture on an annual basis.
Image Source: Zacks Investment Research
The Tech sector has enjoyed a favorable revisions trend for the last few quarters, with the Mag 7 stocks leading the rising estimates trend.
Earnings Season Scorecard and This Week’s Earnings Reports
Through all the results that came out on Friday, August 2nd, we have seen Q2 results from 377 S&P 500 members, or 75.4% of the index’s membership. Total earnings for these index members are up +11.2% from the same period last year on +5.5% higher revenues, with 79.6% beating EPS estimates and only 59.2% able to beat revenue estimates.
Plenty of Q2 results are still to come, even though we have seen results from three-quarters of the S&P 500 already. This week, more than 1,300 companies, including 80 S&P 500 members, will report results. The notable companies on deck to report results this week include Disney, Expedia, Eli Lilly, Airbnb, Uber, Caterpillar, Ralph Lauren, Shopify, and others.
The comparisons charts below put the earnings and revenue beats percentages for these companies in a historical context.
Image Source: Zacks Investment Research
The one notable feature of the above comparison charts is the very low level of Q2 revenue beats percentage. In fact, the Q2 revenue beats percentage of 59.2% is a new low for this group of index members over the preceding 20-quarter period (5 years).
The comparison charts below put the Q2 earnings and revenue growth rates for these companies in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
Looking at Q2 as a whole, combining the actual results that have come out already with estimates for the still-to-come companies, total S&P 500 earnings are expected to be up +10.5% from the same period last year on +5.3% higher revenues.
This is the highest earnings growth pace in the last nine quarters since the +35.7% growth rate in 2021 Q4.
The chart below that shows the year-over-year earnings and revenue growth for 2024 Q2 in the context of what we saw in the preceding four periods and what is currently expected for the following three periods.
Image Source: Zacks Investment Research
Looking at earnings expectations on an annual basis, total 2024 S&P 500 earnings are expected to be up +8.5% on +1.9% revenue growth.
The expected revenue growth pace improves to +4.2% once Finance is excluded from the aggregate data, with the index level aggregate earnings growth for the year declining only to +8.1% on an ex-Finance basis.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>> Breaking Down the Q2 Earnings Season Scorecard
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Magnificent 7 Earnings: Good or Bad?
Of the six members of ‘The Magnificent 7’ group that have already reported June-quarter results, the market was disappointed with Tesla (TSLA - Free Report) , Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) , and Amazon (AMZN - Free Report) . Conversely, it was okay with Apple’s (AAPL - Free Report) quarterly release and loved Meta’s (META - Free Report) results.
This is clearly not a good picture and likely suggestive of tougher times ahead for the group. Some in the market are likely thinking the Mag 7 leadership of the market is likely behind us.
I will push back on parts of this narrative, as most of the Mag 7 stocks provide some of the most sustainable growth performance in the entire market.
Aside from Apple, which is likely no longer a growth company, and Tesla, which is dealing with a combination of competitive pressures and a cyclical downturn in its core market, the other five are not only generating impressive top- and bottom-line growth today, but the trend is expected to remain in place at least through next year, if not beyond.
Take the case of Amazon, which modestly missed the Zacks Consensus revenue estimate. Amazon’s Q2 earnings almost doubled from the year-earlier level (up +99.8%) to $13.16 billion on +10.1% higher revenues to roughly $148 billion.
Alphabet beat on the top and bottom lines, with its Q2 earnings up +28.6% to $23.6 billion on +15% higher revenues to $71.4 billion. Microsoft also beat on the top- and bottom lines, coming out with Q2 earnings that increased +9.7% to $22 billion on +15.2% higher revenues to $56.2 billion.
So why is everyone so glum if these companies are bringing in so much in revenues and earnings?
The answer to that question lies in what these companies are doing to prepare for the artificial intelligence (AI) world. Each one is heavily investing in building out the AI infrastructure; the amounts involved are huge and bigger than what many in the markets had been expecting. And that is the primary reason why investors are so glum; they feel that these companies haven’t provided a good-enough explanation of how these huge investments will be monetized.
We noted in this space last week the comment from Alphabet's CEO, who said that underinvestment in the AI opportunity represented a bigger risk at this stage than the alternative.
We have no reason to think that these otherwise very well-run companies are throwing good money on questionable projects. As such, we like these companies investing in their future, which will ensure their importance and leadership status in the AI-centric future world. In other words, we think the market’s capex fixation is overdone.
Take a look at the chart below that shows current consensus expectations for the ‘Mag 7’ stocks as a whole for the current and coming periods in the context of what they were able to achieve in the preceding period. The +33.5% earnings growth is comprised of actual results from the six group members that have reported and estimates for Nvidia (which reports on August 28th).
Image Source: Zacks Investment Research
The chart below that shows the group’s earnings and revenue growth on an annual basis.
Image Source: Zacks Investment Research
Beyond these Mag 7 players, total Q2 earnings for the Technology sector as a whole are expected to be up +20.3% from the same period last year on +10.1% higher revenues.
The chart below shows the sector’s Q2 earnings and revenue growth expectations in the context of where growth has been in recent quarters and what is expected in the coming four periods.
Image Source: Zacks Investment Research
The chart below shows the sector’s growth picture on an annual basis.
Image Source: Zacks Investment Research
The Tech sector has enjoyed a favorable revisions trend for the last few quarters, with the Mag 7 stocks leading the rising estimates trend.
Earnings Season Scorecard and This Week’s Earnings Reports
Through all the results that came out on Friday, August 2nd, we have seen Q2 results from 377 S&P 500 members, or 75.4% of the index’s membership. Total earnings for these index members are up +11.2% from the same period last year on +5.5% higher revenues, with 79.6% beating EPS estimates and only 59.2% able to beat revenue estimates.
Plenty of Q2 results are still to come, even though we have seen results from three-quarters of the S&P 500 already. This week, more than 1,300 companies, including 80 S&P 500 members, will report results. The notable companies on deck to report results this week include Disney, Expedia, Eli Lilly, Airbnb, Uber, Caterpillar, Ralph Lauren, Shopify, and others.
The comparisons charts below put the earnings and revenue beats percentages for these companies in a historical context.
Image Source: Zacks Investment Research
The one notable feature of the above comparison charts is the very low level of Q2 revenue beats percentage. In fact, the Q2 revenue beats percentage of 59.2% is a new low for this group of index members over the preceding 20-quarter period (5 years).
The comparison charts below put the Q2 earnings and revenue growth rates for these companies in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
Looking at Q2 as a whole, combining the actual results that have come out already with estimates for the still-to-come companies, total S&P 500 earnings are expected to be up +10.5% from the same period last year on +5.3% higher revenues.
This is the highest earnings growth pace in the last nine quarters since the +35.7% growth rate in 2021 Q4.
The chart below that shows the year-over-year earnings and revenue growth for 2024 Q2 in the context of what we saw in the preceding four periods and what is currently expected for the following three periods.
Image Source: Zacks Investment Research
Looking at earnings expectations on an annual basis, total 2024 S&P 500 earnings are expected to be up +8.5% on +1.9% revenue growth.
The expected revenue growth pace improves to +4.2% once Finance is excluded from the aggregate data, with the index level aggregate earnings growth for the year declining only to +8.1% on an ex-Finance basis.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>> Breaking Down the Q2 Earnings Season Scorecard