I’d say there’s no more pressing question than whether the largest US tech companies will deliver on the growth outlook implied by their valuation metrics, but that’d be… well, uncouth, let’s call it.
There are certainly more pressing questions in the world than that. Here’s an example: Is humanity staring at an accelerated climatic oblivion? The answer appears to be “yes,” or at least “maybe,” judging by catastrophes like what’s unfolding in California.
Here’s another example of a question more pressing than the medium-term financial prospects for tech businesses: Will we continue to backslide such that human suffering worsens at the aggregate level, putting to bed, once and for all, the notion that our species is still on a path to the sort of utopia that’s theoretically possible when economic growth and development balloon exponentially over what, in the historical context anyway, was a very short window?
Ostensibly, tech companies can solve a lot of humanity’s biggest problems, but let’s face it: They’re more interested in profits than they are in delivering any sort of salvation, and some of the people who run those companies are lost down the “red pill” rabbit hole, as evidenced most recently by Mark Zuckerberg’s comically doltish, nefariously dishonest chat with Joe Rogan. If AI does escape the lab and overthrow its overlords, I’d venture the machines can’t possibly be any more dangerous for the species than tech CEOs whose right-wing delirium is at times indistinguishable from what you might find in a speech bubble emanating from a comic book villain.
But, if all you care about’s the trajectory of the equity market, then you could fairly assess that “Mag7” sales and earnings growth are the most important considerations on the face of the planet. After all, the top names comprise ~35% of S&P 500 market cap, and US shares now dominate global benchmarks to a degree that’s hard to fathom.
Ostensibly anyway, it’d be a good thing if the rest of the market — which in the US context means the so-called “S&P 493” — could catch up to the giants, but as I’ve cautioned on any number of occasions over the past three of four years, we might be past the point of no return on that, which is to say it might be mathematically challenging for the “broad” market to perform absent ongoing gains for the narrow leadership.
With that in mind, consensus still expects a “catch up,” at least in terms of growth rates. Given that the very same consensus also expects continued gains for equities, it’s by definition true that analysts collectively believe it’s still possible for stocks to hold up, or even to thrive, in a scenario where the fundamentals shift in favor of the “other” stocks in the index, even if that shift doesn’t result in faster growth rates (versus the biggest names) for companies not counted in any leadership grouping.
The figure below, from Goldman, shows you what’s expected for the mega-caps versus what analysts see for the rest of the market.
So, EPS growth for the Mag7 should clock in at around 33% for all of 2024, a full 30ppt better than the meager 3% bottom-line growth the rest of the index probably mustered for the year. But that gap’s seen shrinking dramatically in 2025, and should be just 4ppt in 2026, if you put any (figurative or literal) stock in company analysts’ projections.
“The outperformance of the Magnificent 7 over the last few years has tracked closely with their earnings superiority,” Goldman’s David Kostin remarked. Although the bank agrees the performance gap will narrow this year, Kostin went on to say that “the bar for the Magnificent 7 posed by consensus estimates is much lower in 2025 relative to the last few years,” potentially setting the stage for positive surprises, which “would likely widen the expected growth gap for 2025, spurring continued outperformance by the biggest stocks.”
16% EPS growth in 2026 (i.e., current, bottom-up Mag7 consensus) would be less than half the Mag7 profit growth rate in 2024, but it’d probably be robust enough to sustain share prices. The question isn’t whether the best companies the world’s ever known can keep performing if they “only” grow earnings by 16%. The question, rather, is whether they can perform in the event earnings growth were to slip into the mid- to low- single-digits, or even go negative. And also what happens to the “broader” market in such a scenario.
If the AI currently being used by folks like Yahoo, Google, Amazon and others in their relationships with me, is an example of the wonders we are to receive from AI, count me out. They are not ready for prime time. I am petrified at the prospect that AI will find its way into medicine, medical record-keeping, utilities, finance, or any other activities required for daily life. I am scared to death because the very process of creating AI to begin with is one of making successive approximation errors until one “gets it right.” Would you want to hear your surgeon say “oops” while testing some AI rules? Also, no one knows if AI, once created, will be in any way, stable. I don’t think it can be. My late wife was a labor statistician for the State of Ohio, with results sent to DC every month (and immediately reported here). She was responsible for non-profits and small firms. In my last year as a regular TA we used to talk about the issues related to sampling theory and estimation algorithms. (Yes, we were both geeks. It’s a tough life but somebody’s got to do it.) Mostly, my wife and her colleagues were concerned about the inherent instability of the process and its outcomes. The labor department was steadfast in trying to create a false sense of stability by keeping all the estimation rules constant for as long as possible.
As to the most pressing question. For me that is absolute. There are over 200 sovereign nations on earth. The peoples living in each of these nations wants to live their own way. For humans to survive as a species all of us will have to put aside all personal desires, pool all our wealth, share all out resources, put aside our individual spirituality, learn one language, and work together for one common goal, survival. [Bees do it, ants do it, … ] No room for the luxury of differences of opinion or anything else. The chances of that happening approach zero. The beliefs of the three “great” religions, alone, will prevent the necessary adjustments. No one nation must be allowed to survive as the single leader, especially not the US, China, India, or Russia (or whatever it calls itself these days). We got notes to this effect during this decade. One of those is being opened right now in sunny, windy CA. My nephew and his family are among 100,000 under evacuation orders and moved 70 mi east to be with my sister, who herself has been evacuated from her house twice in the last five years.
H-Man, when the dominoes supporting the Mag 7 start to fall, the first question will be “how did I not see that?”
The S&P 493 are facing margin pressures everywhere especially in wages. There is no chance of hitting the 11% eps growth target with current economic trends.
The idea the S&P493 will go from 3% eps growth to 11% is laughable to the point of you really need to think it’s all about to crash. If the so called experts are so blatantly lying to themselves or to us, then you have reached the last stage in the cycle.