In the third quarter of 2024, the earnings of these seven stocks grew by 18 per cent year over year, compared to just 2 per cent 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, highlighted that these seven stocks accounted for almost all the earnings growth during the first three quarters of 2024.
“However, the earnings gap could begin to narrow, according to forecasts for the rest of 2024 and the first couple of quarters of 2025,” 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 elevated.
However, these companies’ relative valuations are now below their 2020 peaks, while valuations of non-Magnificent Seven companies are much closer to the historical average of the S&P 500 overall.
Forecasts and market trends
American Century cited analyst projections for S&P 500 earnings to grow 11.8 per cent in the fourth quarter of 2024, with US profits expected to climb approximately 9 per cent for the 2024 calendar year and 15 per cent in 2025.
However, US policies on tariffs, taxes and government spending could impact those forecasts, the manager noted.
It also identified several trends influencing earnings growth, including a continuous demand for AI infrastructure driven by large cloud computing providers advancing their AI initiatives.
The hyperscalers – Microsoft, Amazon, Alphabet and Meta – which represent approximately 22 per cent of the overall S&P 500’s spending on capital expenditures, are projected to spend $205 billion this year, a 46 per cent increase compared to 2023.
In contrast, other S&P 500 companies are not expected to boost their spending on capital expenditures, according to data.
The firm explained that many companies, which paused or delayed their spending decisions in the short-term, cited the uncertainty over the outcomes of the US election earlier this year as one of the reasons.
Shifts in consumer spending
Despite achieving their 16th consecutive quarter of revenue growth, US consumer-facing companies have started to report shifts in spending habits as low-income consumers are under more pressure.
“We also saw further signs that higher-income consumers are trading down,” American Century portfolio managers said.
The firm noted that, for instance, Walmart gained 75 per cent of its market share growth from households earning over $100,000.
“Many consumers may have had enough of higher prices and are choosing cheaper private-label products or restaurants where they believe they get better value.”
Meanwhile, non-US markets are also facing challenges.
America Century pointed to Richemont, the owner of Cartier and Piaget, missing analysts’ expectations due to weaker demand from China.
Similarly, Europe’s automakers grappled with weakness in global demand, prompting restructuring and job cuts.
Moreover, Japan’s auto and auto parts sector was also under pressure, with companies’ results generally attributed to weak demand in the US and increasing incentive costs.
The fund manager predicted mixed forecasts for non-US developed markets, with European earnings likely to grow by 4.2 per cent in the fourth quarter and slow to 2.7 per cent in the first quarter of 2025.
Japan, meanwhile, may experience slightly negative growth for the quarter.
