Mag Seven Outshine S&P with 49% Earnings Surge

Key Takeaway

• The "Magnificent Seven" tech giants, excluding Nvidia, reported a combined earnings growth of 49%, significantly outpacing the S&P 500's overall performance.
• Despite high interest rates, these companies' strong margins suggest resilience in their financial health and investor confidence.
• Analysts anticipate a shift towards broader market growth as the differential between tech giants and other sectors narrows, with expectations of continued strong EPS growth into 2025.

Earnings Season Surprises

The first quarter of 2023 has been a revelation for the S&P 500, showcasing the strongest growth in profits since the second quarter of 2022. This surge is attributed to the stellar performance of the so-called Magnificent Seven - Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., and Tesla Inc., with Nvidia Corp. yet to announce. Despite setbacks from Tesla and Meta Platforms, the collective earnings of these tech giants, including estimates for Nvidia, are expected to exceed 49% growth, significantly outpacing the nearly 14% growth in the same period last year. This remarkable achievement underscores the resilience and strategic prowess of these companies in navigating the challenges posed by higher inflation and interest rates.

Margins Defy Interest Rate Pressure

In an environment where high interest rates have become the norm, the ability of companies, especially the large caps, to maintain strong profit margins is noteworthy. According to Andrew Lapthorne of Societe Generale, the lack of leverage on these companies' balance sheets, coupled with the slow turnover of fixed debt, has insulated them from the immediate impacts of rising rates. This resilience is not mirrored by smaller businesses, which are more vulnerable due to higher leverage and floating debt. The performance of large cap stocks, therefore, stands out as they continue to outperform their weaker counterparts across global markets, excluding China.

Liquidity Dynamics and Market Implications

The liquidity landscape has been a focal point for investors, especially in light of recent taxation flows and adjustments in the Treasury General Account (TGA). The Federal Reserve's decision to taper its Quantitative Tightening (QT) purchases more than expected, reducing them from $60 billion to $25 billion, signals a significant shift. This move, along with the Treasury's strategy to favor short-term bills over long-dated bonds, aims to maintain market liquidity. Dan Clifton of Strategas Research Partners suggests that these decisions will inject an additional $273 billion of net liquidity into the market by the end of September, potentially priming the economy ahead of the US election. This strategic liquidity management is crucial for sustaining market stability and avoiding crises, reflecting a conservative approach rather than a politically motivated one.

Street Views

• Andrew Lapthorne, Societe Generale (Neutral on US and global markets excluding China):

  "Large cap balance sheets don’t have much leverage in the first place and debt rolls over slowly given a lot of it is fixed, meaning it takes a while to incorporate higher interest rates into the system."

• Bank of America Corp.’s analysts (Neutral on Magnificent Seven vs. other companies):

  "Mag Seven earnings to slow, while everyone else’s profits should accelerate."

• John Butters, FactSet (Bullish on Q2 earnings expectations):

  "Analysts are expecting higher earnings for the current quarter, which is very unusual."