In the third quarter of 2024, earnings for these seven stocks grew 18% year over year, compared to just 2% growth among the remaining 493 companies in the index, according to data from American Century Investments.
Jonathan Bauman and Bernard Chua, vice presidents and senior client portfolio managers at the firm, pointed out that these seven stocks accounted for almost all of the earnings growth in the first three quarters of 2024.
“However, based on forecasts for the remainder of 2024 and the first two quarters of 2025, the profit gap may start to narrow,” they said.
The pair noted that the 12-month forward price-earnings multiples of Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla diverged upward from the rest of the index a decade ago and have since remained high.
However, the relative valuations of these companies are now below their 2020 highs, while the valuations of non-Magnificent Seven companies are much closer to the historical average for the entire S&P 500.
Market forecasts and trends
American Century cited analyst projections that S&P 500 earnings would increase 11.8% in the fourth quarter of 2024, with U.S. earnings expected to increase about 9% for calendar year 2024 and 15% in 2025.
However, U.S. policies on tariffs, taxes and government spending could impact these forecasts, the official noted.
The study also identified several trends influencing earnings growth, including continued demand for AI infrastructure driven by large cloud computing providers advancing their AI initiatives.
Hyperscalers – Microsoft, Amazon, Alphabet and Meta – which account for about 22% of the S&P 500’s overall capex spending, are expected to spend $205 billion this year, a 46% increase from 2023.
In contrast, other S&P 500 companies are not expected to increase their capital spending, according to the data.
The company explained that many companies, which have suspended or delayed their short-term spending decisions, cited uncertainty over the results of the US elections earlier this year as one of the reasons.
Changes in consumer spending
Despite reporting a 16th consecutive quarter of revenue growth, U.S. consumer-facing companies have begun to report changes in their spending habits as lower-income consumers come under increased pressure.
“We also saw other signs that higher-income consumers are declining,” American Century portfolio managers said.
The company noted that, for example, Walmart gained 75 percent of its market share growth from households earning more than $100,000.
“Many consumers may be fed up with higher prices and are choosing cheaper private label products or restaurants where they believe they are getting better value. »
At the same time, non-US markets also face challenges.
America Century pointed out that Richemont, owner of Cartier and Piaget, failed to meet analysts’ expectations due to weaker demand from China.
Similarly, European automakers have faced weak global demand, leading to restructuring and job cuts.
In addition, Japan’s automobile and auto parts sector was also under pressure, with company results generally attributed to weak demand in the United States and rising incentive costs.
The fund manager sees mixed forecasts for non-US developed markets, with European earnings likely to grow 4.2% in the fourth quarter and slow to 2.7% in the first quarter of 2025.
Japan, meanwhile, could see slightly negative growth for the quarter.
