Magnificent Seven Earnings to Test Strength of Broadening Stock Market Rally

A critical week of earnings reports from four “Magnificent Seven” companies is set to test the durability of a U.S. stock market rally that has recently begun to broaden beyond its megacap leaders. While the S&P 500 has pulled back slightly from its early June record, performance beneath the surface shows a significant rotation into previously overlooked sectors.

A Market in Rotation

The small group of technology stocks that powered the market's advance has faltered recently, even as other areas have gained strength. This divergence highlights a potential shift in market dynamics, which some analysts view as a healthy development.

Key performance metrics since the market's June 2 peak illustrate this trend:

• The S&P 500 index has declined by just over 2%.
• An ETF tracking the Magnificent Seven has fallen more than 8%.
• The Philadelphia SE Semiconductor Index has pulled back over 19%.
• In contrast, the equal-weight S&P 500, which reduces the influence of large-caps, has gained nearly 4%.

This broadening is further evidenced by the fact that about two-thirds of the S&P 500's components and eight of its 11 sectors have posted gains since the June high, according to a Reuters report. Healthcare and financials have been the top-performing sectors, rising 14% and 12% respectively. "We’re not seeing selling. We’re just seeing money move from one area of the market to another," said Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions.

Earnings Spotlight on Megacaps

Ad

This market rotation faces a major test this week with quarterly results from Microsoft and Meta on Wednesday, followed by Apple and Amazon on Thursday. The reports come after both Alphabet and Tesla saw their shares slide following their own earnings releases last week, setting a cautious tone for the group.

Concerns have emerged around the massive capital spending on AI, as seen with Alphabet, which raised questions about the ultimate return on those investments. While the market can absorb a setback from one or two names, widespread disappointment could pose a challenge. "I don’t think the S&P can ... even remain kind of where it is if there’s a flushing of the AI story," said Mark Hackett, chief market strategist for Nationwide.

Fundamentals and Future Influence

The shift away from megacaps may be supported by fundamentals, as the earnings growth gap between the Magnificent Seven and the rest of the market has closed. "Earnings growth in the broader market is forecasted to have higher earnings growth than the megacap tech stocks by year-end," said King Lip, chief strategist at BakerAvenue Wealth Management.

Despite the recent underperformance, these companies retain an outsized influence, accounting for roughly one-third of the S&P 500's total market capitalization. Their sheer size means their earnings results and stock performance will inevitably have a significant impact on the broader index. "They’re going to have an impact on the S&P 500 one way or the other," noted Chuck Carlson, CEO at Horizon Investment Services.