Key Takeaways
- The Magnificent Seven’s earnings growth accelerated in the third quarter, when analysts yet again underestimated Big Tech’s potential.
- AI investments are expected to support growth, especially for chipmaker Nvidia, but growing concern about an AI bubble could temper the market’s appetite for more AI spending.
- Wall Street is also raising the bar for the Mag 7, with growth expectations for the next year now well above what analysts were predicting a few months ago.
At first glance, the Magnificent Seven had a bit of a stinker of a third quarter. But dig deeper, and there’s reason to believe Wall Street is underestimating tech’s heavy hitters.
The Mag 7—Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META) and Tesla (TSLA)—reported third quarter earnings growth of 18.4%, the group’s slowest growth rate since the first quarter of 2023, according to FactSet Research analyst John Butters.
But that figure comes with a big caveat: Meta’s profit plummeted from the previous year after it booked a $16 billion tax charge. Exclude that one-time expense, and profits actually grew 30%. Not only is that twice as fast as Wall Street was expecting heading into earnings season, it’s also faster than the prior quarter when earnings were up 26%.
“The third quarter saw a slight acceleration in Mag Seven earnings growth, suggesting to us that estimates over the next couple of quarters could be too low,” wrote LPL Financial analysts in a recent note.
Why This Is Important
The Magnificent Seven has been the main driver of S&P 500 earnings growth for several years. Wall Street has been predicting a slowdown for more than a year, but the tech giant’s have repeatedly topped expectations.
Wall Street has been predicting a slowdown in Mag 7 growth for more than a year, but the group keeps blowing past expectations, thanks in large part to artificial intelligence. Microsoft, Amazon, Meta, and Alphabet all signaled that they expect to continue aggressively investing in AI infrastructure next year.
LPL’s analysts expect those investments to support corporate profits “because—assuming they happen—they are revenue for someone.” The primary “someone” is Nvidia, which dominates the AI chip market and last month topped estimates with its sales, profit, and earnings outlook.
AI spending has been more of a liability than an asset for the Mag 7 recently. Investors are concerned that tech giants are overspending—or, at best, inefficiently spending—on a nascent technology that they may struggle to monetize for some time. To many on Wall Street, the AI buildout is looking more and more like the Dotcom Bubble of the 1990s.
“Given these hyperscalers are spending around 25% of revenue on capex, and their capex is draining free cash flows, Wall Street may demand more proof of return on investment going forward,” wrote LPL’s analysts.
Wall Street is also recalibrating its expectations. As of late November, analysts predict the Mag 7’s earnings growth will average 21% over the next four quarters, up from just 15% at the end of August.
Among Mag 7 stocks, only Alphabet and Nvidia, which have gained 66% and 33%, respectively, since the start of the year as of Monday afternoon, have risen more than the S&P 500’s 16% year-to-date increase.
