Remember the S&P 493 “catch up” thesis?
If not, don’t worry, it’s simple. It said the yawning disparity between earnings growth for the mega-cap tech leadership and the rest of the index was set to narrow from both sides going forward, as Mag7 profit growth decelerated (but remained healthy by the standards of “normal” companies) and EPS growth for “lesser” companies picked up.
The result would be a rally built on a more inclusive, and thereby a sturdier, foundation. I don’t know if that ever became “consensus” in a generalized sense of the term, where that means I’m not sure the “catch up” thesis ever enjoyed real buy-in from decision makers and capital allocators. But going strictly by Wall Street forecasts, it was widely viewed as the most likely “resolution” to what’s still described as a perilously concentrated market, where a handful of names account for an outsized share of sales and EPS growth.
It’s too much to call the “catch up” thesis disproven, but the proverbial can was kicked, and not for the first time. Consider the figure on the left below, from Goldman’s David Kostin.
Mag7 EPS growth outstripped the rest of the index by 19ppt in Q2 and by 20ppt in Q1. The gap’s not seen narrowing entirely until late next year.
For context, the EPS growth gap between the “best” and the “rest,” so to speak, was supposed to be just 3ppt in 2025, according to analysts’ forecasts as they stood this time last year. With two of 2025’s four quarters on the books, that gap’s tracking a full 10ppt higher, at 13ppt.
The figure on the right, above, is pretty remarkable. The sharp upward inflection in consensus 2026 EPS for the Mag7 since the beginning of Q2 reporting season now has analysts projecting higher per share earnings next year for the group than they were projecting at the beginning of the year. For the rest of the index, by contrast, analysts have cut their estimates for next year’s profits by 4%.
Call this yet another reminder that not even corporate America’s immune from the “haves”/”haves-nots” divide which, just as much as any “purely” political debate, defines life in the richest, most prosperous and, arguably, most inegalitarian, nation the world’s ever known.
Suffice to say hard work and determination aren’t enough. Frank Abagnale Sr.’s second mouse would’ve drowned too in today’s America.
“The result would be a rally built on a more inclusive, and thereby a sturdier, foundation. I don’t know if that ever became “consensus” in a generalized sense of the term,”
Of course not, inclusive = WOKE. The use of the word “inclusive” instantly triggered urgent AI-generated sell alerts to algo traders because such an outcome would not be welcomed in our nation’s capital.
With all the construction going on at the Eccles, I hope maybe there’s a few second mice running around and ready to climb out of the slime and back Powell.
Speaking of Eccles, The Fed’s bio notes that he oversaw a pegged rate environment geared toward lowering the cost of WWII (rather than past profligacy), sought to unpeg rates to combat rising inflation after the war, then ratted out Truman who lied to the press about the Fed supporting his continuing the peg by releasing the FOMC minutes which demonstrated otherwise. He’s the veritable cornerstone of Fed independence as we used to know it. No wonder Mar-A-Lardo hates that building.
So color me MAMA — Make America Marriner Again.