Broader market growth brings more opportunities
Non-AI companies are finally growing earnings for the first time since 2022, with even small firms catching up.
The “Magnificent Seven” tech stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) have dominated market performance, but their earnings growth is slowing.
Meanwhile, other companies are reporting stronger earnings, signaling a shift toward broader market growth.
Hedge funds, heavily reliant on the Magnificent Seven, have struggled, but the market is now opening opportunities for small and micro-cap stocks, offering more potential for long-term investor gains.
Investor Essentials Daily:
The Monday Macro Report
Powered by Valens Research.
For the first time since 2022, non-AI companies have started growing their earnings. Even the smallest firms are staking their claim.
Of course, the “Magnificent Seven” technology stocks have carried the market…
Collectively, Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) generated almost half the gains of the top 500 U.S. companies in early 2024.
These seven stocks also accounted for 39% of the S&P 500 Index by market cap and they’ve repeatedly boosted the S&P 500 to all-time highs.
But now, other companies are showing up.
Most of them are reporting second-quarter earnings this month, and they’ve been working hard to catch up to the Magnificent Seven.
The net income for non-Magnificent Seven companies has reached its highest level since early 2022. On the other hand, the Magnificent Seven’s growth has slowed to its lowest rate in a year.
These mega-cap tech stocks have been driving market performance for years. Yet recent earnings-growth trends show a clear, substantial shift.
In the first quarter of 2024, these stocks’ corporate earnings grew by 51%. Excluding the Magnificent Seven, the S&P 500 fell by 1%.
Compared with the second quarter, the earnings growth of Magnificent Seven companies declined by 35%. The S&P 500 without the Magnificent Seven saw just 7% growth.
The earnings growth spread between the two groups decreased from 52% to 28% in a single quarter!
Moreover, the second quarter marks the first time non-Magnificent Seven companies saw positive earnings growth since the fourth quarter of 2022.
The Magnificent Seven’s growth is beginning to converge with that of non-Magnificent Seven companies.
Take a look…
This data highlights the beginning of an important shift from concentrated performance in a few stocks to strong showings across different sectors.
Of course, the U.S. economy still relies on the Magnificent Seven and artificial intelligence isn’t going anywhere.
So investors don’t want their growth to slow down too much, especially because good investment alternatives have been hard to find.
Elite hedge funds are a good example of that.
They’ve long invested in large-cap tech companies. And over the past year, most of them have struggled.
They posted gains of roughly 7.5% in the first half of 2024, significantly underperforming the overall market.
They’ve grappled with a limited number of major winners (namely, the Magnificent Seven) and a disproportionate number of losers.
Simply put, hedge funds had two choices: They either held the Magnificent Seven or underperformed the market.
Now, the landscape is changing…
Recent growth trends are making way for stock picks outside of the Magnificent Seven.
We’re entering a market phase where small caps and micro caps will finally start to matter.
In general, these stocks have a lot more growth potential than large caps. It’s much harder for a $2 trillion company like Nvidia to double its earnings than a microcap.
Over time, these smaller companies will generate a lot of wealth.
A broader, healthier market means more winners and more opportunities for investors in the long term.
Best regards,
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
