Of the six members of ‘The Magnificent 7’ group of stocks that have reported September-quarter results already, the market didn’t like three – Apple AAPL, Microsoft MSFT, and Meta META – but loved the Tesla TSLA report and liked what it saw from Alphabet GOOGL and Amazon AMZN.
The group ceded its market leadership role a few months back, and these mixed results can be interpreted to mean that the trend is now here to stay. In other words, the group’s unambiguous market leadership of last year and early this year is now firmly behind us.
I want to push back on part of this narrative, as most Mag 7 stocks provide some of the most sustainable growth performances in the entire market.
Aside from Apple, which is likely no longer a growth company, the other Mag 7 companies 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 Apple, which beat consensus estimates and whose Q3 earnings increased +8.8% from the year-earlier level to almost $25 billion on +6.1% higher revenues of nearly $95 billion. Apple may no longer command the growth pace of its peers like Amazon, Alphabet, or Meta, but it enjoys a degree of market dominance that is hard to dislodge by its competitors, let alone start-ups.
Microsoft’s Q3 earnings were up +10.7% on +16% higher revenues, while Meta’s earnings increased +35.4% on +18.9% revenue growth. Both companies beat top- and bottom-line consensus estimates.
If one was nitpicking the results from these two companies, then signs of deceleration in Microsoft’s cloud revenues and Meta’s advertising revenues would be the only operating issues here. Is that the issue in the Microsoft and Meta reports, or is there something else at play?
The answer to that question lies in what Microsoft and Meta are doing to prepare for the artificial intelligence (AI) world. Each of them is heavily investing in building AI infrastructure, and the amounts involved are massive and bigger than many in the markets had been expecting.
In fact, Microsoft and Meta are hardly alone in this boat, as Alphabet and Amazon are spending as heavily on AI infrastructure as these two.
In fact, Apple is the lone laggard in this regard, though it has started talking more about the AI capabilities embedded in its coming software upgrades that will require users to have the newest iPhones. However, we should remember that unlike Apple, which is solely a consumer-facing operator whose AI functionalities will be targeted at consumers, the other Mag 7 players primarily target businesses with their AI offerings.
Alphabet and Amazon have been able to explain and show the impact and contribution of AI spending level on its current and coming growth trajectory this earnings season. Microsoft and Meta didn’t do a good job on that front.
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 that will ensure their primacy 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 +30.5% earnings growth comprises actual results from the six group members that have reported and estimates for Nvidia (which reports on November 20th).
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The chart below shows the group’s earnings and revenue growth on an annual basis.
Image Source: Zacks Investment Research
Beyond these Mag 7 players, total Q3 earnings for the Technology sector are expected to be up +19.3% from the same period last year on +11.4% higher revenues. Please note that had it not been for the big hit that Intel took in Q3, earnings growth for the sector would be +30.5%.
The chart below shows the sector’s Q3 earnings and revenue growth expectations in the context of where growth has been in recent quarters and what is expected in the coming three periods.
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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 in the fore front of the rising estimates trend.
Q3 Earnings Season Scorecard
Through Friday, November 1st, we have seen Q3 results from 350 S&P 500 members, or 70% of the index’s total membership. With 104 S&P 500 members on deck to report results this week, we will have seen Q3 results from more than 90% of the index’s membership.
Total earnings for these 350 companies that have reported are up +8.8% from the same period last year on +5.7% higher revenues, with 74.9% of the companies beating EPS estimates and 60.6% beating revenue estimates.
The proportion of these 350 index members beating both EPS and revenue estimates is 50.3%.
The comparison charts below put the Q3 earnings and revenue growth rates and the EPS and revenue beats percentages in a historical context. The first set of comparison charts show the earnings and revenue growth rates.
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The second set of comparison charts compare the Q3 EPS and revenue beats percentages in a historical context.
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The comparison charts below spotlight the revenue performance and the blended beats percentage for this group of 350 index members.
Image Source: Zacks Investment Research
As you can see above, the growth trend appears to be stable and positive, though fewer companies are beating consensus estimates relative to other recent periods. In fact, both the EPS and revenue beats percentages are tracking below the 20-quarter average for this group of companies, with the Q3 revenue beats percentage just a hair above the low point for the preceding 20-quarter period.
The Earnings Big Picture
Looking at Q3 as a whole, combining the results that have come out with estimates for the still-to-come companies, total earnings for the S&P 500 index are expected to be up +6.8% from the same period last year on +5.4% higher revenues.
The chart below shows the Q3 earnings and revenue growth pace in the context of where growth has been in the preceding four quarters and what is expected in the coming three quarters.
Image Source: Zacks Investment Research
The Energy and Tech sectors are having the opposite effects on the Q3 earnings growth pace, with the Energy sector dragging it down and the Tech sector pushing it higher.
Had it not been for the Energy sector drag, Q3 earnings for the S&P 500 index would be up +9.2% instead of +6.8%. Excluding the Tech sector’s substantial contribution, Q3 earnings growth for the rest of the index would be only +2% instead of +6.8%.
Excluding the contribution from the Mag 7 group, Q3 earnings for the rest of the 493 S&P 500 members would be up only +1.3% instead of +6.8%.
For the last quarter of the year (2024 Q4), total S&P 500 earnings are expected to be up +7.7% from the same period last year on +4.4% higher revenues.
Unlike the unusually high magnitude of estimate cuts that we had seen ahead of the start of the Q3 earnings season, estimates for Q4 are holding up a lot better, as the chart below shows.
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The chart below shows the overall earnings picture on a calendar-year basis, with the +7.5% earnings growth this year followed by double-digit gains in 2025 and 2026.
Image Source: Zacks Investment Research
Please note that this year’s +7.5% earnings growth improves to +9.5% on an ex-Energy basis.
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>Tech Flexes Earnings Power: A Closer Look
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