The Shifting Landscape of the Stock Market Rally
As we enter the second half of 2024, a crucial theme has emerged in the stock market: the broadening of the rally. With rate cuts underway and economic data indicating that the US economy is in better shape than initially thought, the recent push to new record highs has been driven by companies beyond the usual tech giants.
A Shift in Earnings Growth
Data from FactSet reveals that earnings for the 493 companies in the S&P 500 outside of the “Magnificent Seven” (Apple, Alphabet, Microsoft, Meta, Tesla, Nvidia, and Amazon) are expected to grow by an average of over 13% in the next five quarters. In contrast, the Magnificent Seven are expected to see earnings growth of nearly 19% over the same period. Notably, this represents a pickup in growth for the 493 companies and a slight decline for the Magnificent Seven.
A Narrowing Gap
While the gap between the two groups is narrowing, some strategists believe that Big Tech could still lead the market. Nicholas Colas, co-founder of DataTrek, notes that the Magnificent Seven are expected to post superior earnings growth, suggesting that tech “should begin to play catchup into the end of the year.”
Assessing Earnings Momentum
Going forward, the key to outperformance will be assessing whether Big Tech or the rest of the S&P 500 exhibits better earnings momentum. If US GDP growth reaches 3% in 2025, the S&P 493 may be the better bet. However, if growth is more modest, Big Tech may have the edge.
Tech Revival Underway
The tech revival may already be underway, with Nvidia soaring to a fresh record high and Apple stock closing at a record high. Netflix, the first of the large tech giants to report earnings, saw a massive rally in its stock after another impressive round of earnings. This move serves as a reminder that while growth in tech is expected to slow, there can still be upside surprises.
Empirical Evidence
The past 18 months of tech earnings reports have consistently come in better than expected, providing empirical evidence that tech can still outperform. As the landscape of the stock market rally continues to shift, one thing is clear: the debate over whether Big Tech or the rest of the S&P 500 will lead the market is far from over.
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