Nvidia earnings seal Big Tech stock dominance

The S&P 500 has printed two dozen record highs this year, but it increasingly relies on the Magnificent 7 tech stocks.

May 27, 2024 - 22:30

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Nvidia earnings seal Big Tech stock dominance

Nvidia's blowout earnings wrapped up another headline reporting season for the so-called Magnificent 7 tech stocks, underscoring their broader market dominance amid this year's record-setting rally.

Nvidia's (NVDA) first quarter earnings tally included both a fivefold increase in overall revenue, which topped $26 billion, and a massive surge in net income that produced a bottom line of $15.24 billion.

With that final final report, the collective net income of the Magnificent 7 tech stocks, which include Microsoft (MSFT) , Apple (AAPL) , Alphabet (GOOG) , Amazon (AMZN) , Meta Platforms (META) and Tesla (TSLA) , tallied $108.9 billion over the first quarter.

That's a more than 50% gain from the same period last year and dwarfs the 5.5% advance for collective earnings growth for the whole of the S&P 500, based on data from FactSet.

"Q1 was the fifth quarter in a row where, if Magnificent 7 contribution is taken out, the remaining 493 S&P500 constituents have shown outright negative year-on-year earnings growth," JP Morgan strategists said in a recent client note.

The S&P 500 is driven *increasingly* by just 7 big tech stocks, which have powered more than half the benchmark's year-to-date returns.
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The Magnificent 7 stocks in fact have driven more than half the S&P 500's year-to-date return, according to data from Bank of America's weekly 'Flow Show' report, even as they comprise only around 31% of the benchmark's overall weight.

The bank described the gains as "monopolistic megatech monopolizes performance."

Tech's strengthening grip on the S&P 500

Nvidia, meanwhile, has powered nearly a quarter of the S&P 500's return with its year-to-date advance of around 115%, a move move that has lifted its market value to around $2.55 trillion.

The outsized performance of the Mag 7, which together are up 24% this year, is also widening the separation between the S&P 500 and its equal-weighted rival.

The biggest benchmark of U.S. blue-chip shares, which has notched 24 record highs this year, is up 15.56% over the past six months, compared with a 12.1% gain for the S&P 500 Equal Weight Index.

That gap has been widening since the market began to rally in early May, suggesting that Big Tech strength, and not broader earnings quality, could be driving the lion's share of gains.

A separate Bank of America report, the closely-tracked monthly survey of global fund managers, noted that more than half of respondents saw "long Magnificent 7" stocks is the market's most-crowded trade.

That's well ahead of the 12% worried about "long US dollar" and the 10% concerned about "short China equities" positions.

Tech earnings dominance

Tech is likely to continue its grip on broader market performance into the summer months and beyond.

LSEG data suggest that the communications services sector, including Google and Meta, and the information technology sector, including Microsoft, Apple, and Nvidia, will contribute just over half the S&P 500's $494.4 billion in second-quarter earnings.

Looking into the second half, however, some analysts see the Magnificent 7 dominance fading in favor of the broader fundamental improvements developing in other sectors.

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"For example, the Magnificent 7’s Q4 2024 earnings growth projection of 14% lags the rest of the index’s 17%, as equity analysts appear to be anticipating more abundant opportunities for profit growth beyond the market darlings," said Jason Pride, Glenmede's chief of investment strategy and research, in a recent report.

Recent data, in fact, offer some support for that view, with energy, materials and utilities firmly outperforming tech and communications services over the past three months.

But portions of that trade, too, could be tied to the expected surge in AI-related technologies.

"Companies that support the expansion of electricity generation to support growing demand from cloud computing and EVs are prospering," said Louis Navellier of Navellier Calculated Investing.

"With the earnings season largely over, the market will start to oscillate going forward and any stocks that post good earnings are good buys on dips," he added. "I suspect that energy stocks will be the best-performing stocks in June."