Magnificent seven earnings to lag as S&P 493 seen growing 27.7%

The rest of the S&P 500 is projected to outgrow the AI-led cohort by 7.4 percentage points, per Russell Investments.

Magnificent seven earnings are projected to rise 20.3% year over year in the third quarter, trailing a 27.7% gain for the rest of the S&P 500, according to Russell Investments. That is a gap of 7.4 percentage points. In the second quarter, FactSet said the cohort’s earnings doubled while the rest of the index grew 30%.

S&P 493 projected to beat megacaps on profit growth

The report places that shift in the context of weakening breadth. It says the S&P 500 set an all-time high on Tuesday, helped by megacaps, while the S&P 500 equal-weight index was about 6% below its record and 75% of S&P 500 constituents finished September in the red. Nvidia, described as the index’s largest component at roughly 8%, also hit a record, and technology accounts for nearly 40% of the index by market value, the report says.

In a cap-weighted index, larger companies move the headline level more than smaller ones even when most stocks are down. That helps explain how record highs can coincide with weak participation, and why stronger profit growth among the S&P 493 might not immediately change the index’s leadership.

BeiChen Lin, head of Canadian strategy at Russell Investments, said the earnings picture has become “much more broad based” and argued valuations outside the hyperscalers look cheaper. “I do think it’s reasonable to expect that ultimately market performance will also broaden out as well — in addition to just fundamental earnings,” Lin said. The report adds that Lin expects the S&P 500 could end the year 5% above current levels, with the potential for more strength in 2027.

Breadth and concentration show a split

Separately, FactSet’s John Butters noted last week that a record number of S&P 500 companies are issuing positive guidance, according to the report. The third-quarter reporting season begins Thursday, with Delta Air Lines and PepsiCo scheduled to report, the report says.

The report cautions that broader earnings growth will not necessarily translate into more stocks joining the rally, particularly among names most sensitive to macro pressures. Art Hogan, chief market strategist at B. Riley Wealth, pointed to sectors that have been hit, saying he likes financials after a 7% drop in September for the group. “I just think you have an opportunity once some of these banks and credit card companies start reporting to really see a nice bounce,” Hogan said.

The earnings data show the size of the expected outperformance, not how investors will price it. Results over the coming weeks will show whether fundamentals, rather than outside forces, drive leadership beyond the megacaps.

Source: CNBC.
This article was written with AI assistance and reviewed by an editor.
This content is for informational purposes only and does not constitute financial advice.