'The Other 493' Set To Grow More Than 'Magnificent 7' This Earnings Season: Bank Of America

The second quarter is projected to be the first in which the “Other 493” companies — those outside the “Magnificent 7” tech giants — will exhibit earnings growth after five quarters of stagnation or decline.

This development could broaden market gains as tech sector growth slows, according to Bank of America.

Bank of America’s analysts, Ohsung Kwon, CFA and Savita Subramanian, presented a more conservative outlook on Q2 earnings for U.S. companies compared to consensus estimates.

While the consensus expects earnings per share (EPS) to rise by 9% year-over-year in Q2, the analysts anticipate a 2% beat which aligns with historical averages but is the smallest since Q4 2022.

Behind the weaker-than-expected forecasts, analysts cited the weak macroeconomic data last quarter.

“Economic Surprise Index is at the lowest level since June 2015. The historical relationship points to a 3% EPS miss,” Bank of America wrote.

‘Magnificent 7 vs. The Other 493’

The Invesco S&P 500 Equal Weight ETF RSP has underperformed the cap-weighted SPDR S&P 500 ETF Trust SPY by approximately 13 percentage points year-to-date. This gap widens significantly when comparing the broader market with the Magnificent 7, as tracked by the Roundhill Magnificent Seven ETF MAGS, as illustrated in the chart below from Benzinga Pro.

This trend could potentially be halted in the upcoming weeks. As the tech sector’s rapid growth begins to decelerate, the broader market, represented by the “Other 493” companies, is poised for earnings growth, according to Bank of America.

“2Q is expected to be the first EPS growth quarter for the Other 493 since 4Q22, whereas growth for the Magnificent 7 is expected to slow for the second straight quarter and again in 3Q,” analyst wrote.

The Magnificent 7’s earnings recovery began earlier because they entered an earnings recession in the second half of 2022. This prompted tech companies to implement cost-cutting measures sooner, resulting in an earlier recovery, Bank of America explained.

Year-to-date, tech layoffs have significantly decreased, while layoffs outside the tech sector have increased, indicating more cost-cutting opportunities in non-tech industries.

These efforts are expected to enhance margins for the “Other 493” in 2024-25.

‘Virtuous Cycle’ From AI Investments

A virtuous cycle appears to be forming from AI investments. Major tech companies — Microsoft Corp. MSFT, Amazon.com Inc. AMZN, Alphabet Inc. GOOGL and Meta Platforms Inc. META — confirmed last quarter that 2024 is set to be the first year of a multi-year AI investment cycle. The consensus capex forecast for these companies increased by $18 billion during Q1 earnings season to approximately $200 billion, a 34% year-over-year rise.

Historically, companies in reinvestment cycles underperform, but AI investments could create a virtuous cycle.

Semiconductor “are the most obvious beneficiaries,” Bank of America highlighted. Yet, the rising power consumption from AI and the construction of data centers are anticipated to boost demand for electrification, construction, utilities, and commodities, ultimately creating more jobs.

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