The slowdown in the growth of the Magnificent 7

From a market capitalization perspective, the Magnificent 7 now represent 31% of the S&P 500, also close to an all-time high.

It's officially earnings season for the Magnificent 7. Tomorrow we'll get results from Alphabet and Tesla , on Thursday from Amazon , and next week from Meta, Apple, and Microsoft . To say this will be a big deal for the market is an understatement. The three months of market recovery have been driven by Big Tech.

From a market capitalization perspective, the Magnificent 7 now represent 31% of the S&P 500 , also close to an all-time high.

As Jason Pride of wealth management boutique Glenmede points out, earnings growth should be solid this quarter, but not exceptionally strong. Big Tech's annual earnings growth results have been flat or slowing for the past few quarters, and are expected to slow further in 2025 and 2026. Nvidia's earnings growth in 2023 and early 2024 was uneven, but followed a similar pattern. Tesla is an outlier, as its earnings are highly variable.

For the market and these companies, this is potentially a bad sign: over the past two years, investors have often punished the Magnificent 7 stocks for very good, but unsurprising, earnings data. A further slowdown in growth does not bode well. Take Microsoft's performance over the past year, for example; earnings per share beat Wall Street estimates every quarter, but the stock fell in every one except for the one ending in April of this year, when earnings were 8% higher than estimates, compared with improvements of 1.7%, 7.1%, and 2.9% in the previous three quarters.

In such an expensive market, it's entirely reasonable to expect a lot from the most expensive stocks. And, as Dec Mullarkey of asset manager SLC Capital Management astutely points out, part of the slowdown in earnings growth is due to normalization toward an increasingly higher annual base.

Still, Bank of America predicts that the Magnificent 7 are expected to maintain their earnings growth advantage over the rest of the S&P 500 for only another 18 months.

That slowdown is worrisome, especially for this year. But 18 months is still a long time. And fortunately, there are two sides to this story: the market expects a slowdown in earnings growth for the Magnificent 7 and a rebound in earnings growth for the S&P 493. The Magnificent 7 should continue to grow around 14% and could accelerate again in 2027, while the rest of the market is expected to catch up. “[There is] a constructive aspect to this market,” says Kevin Gordon of Charles Schwab. “The last time the Magnificent 7 slowed, so did everyone else, resulting in the 2022 bear market. As long as breadth holds, we could get the best of both worlds.”

If we achieve a broader market, it will be an unmitigated achievement, provided large companies can continue to keep the S&P 500 afloat until then. Slowing earnings growth and the high likelihood of poor forecasts regarding tariffs and capital spending will be a challenge.

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