2. A broader revenue recovery is underway as The Magnificent 7 slows
JPMorgan Asset Management
The large growth stocks that have long driven the S&P 500 took a big hit in 2022, suffering their worst share price decline since 2008. Profits at the seven biggest companies — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — fell 14% for the year, while the rest of the S&P 500 enjoyed 9% growth.
Since then, these tech giants have dwarfed the rest of the market with profit growth and returns. The so-called “Mag 7” stocks grew profits 31% last year and are on pace to post similarly strong profits this year. By contrast, the other 493 stocks in the S&P 500 have seen profits decline in 2023.
What’s even more surprising, Santos noted, is that the Mag 7 stocks will account for 89% of the S&P 500’s return in 2023, well above the 65% return in 2019. The market is undoubtedly top-heavy, and while that may not lead to catastrophe, it’s also likely not sustainable.
“I don’t think it’s a bubble,” Santos said at the event. “I think there are good reasons for stocks to continue to rise. It’s just that the contribution is just too big.”
The Magnificent Seven no longer trades like a monolith, as Nvidia and Microsoft have separated from laggards like Tesla this year. But for simplicity’s sake, JPMAM strategists compared the group to the rest of the S&P 500, and that group’s earnings forecasts have been surprising.
According to JPMAM, the long-standing gap between the Magnificent 7 and the S&P 493 will narrow over the next few quarters before disappearing entirely. The firm expects fourth-quarter earnings to rise 17% for both Magnificent 7 and non-Magnificent 7 stocks, which would be a big improvement for non-Magnificent 7 companies, which were down about 2% to start the year.
JPMAM forecasts that all 11 market sectors will enjoy earnings growth in the fourth quarter for the first time since the second quarter of 2021, including healthcare, energy and materials, which saw earnings declines earlier this year.
