The ongoing quarterly earnings season is witnessing a long-awaited recovery in companies that were previously overshadowed by the AI boom.
What Happened: A shift in profit growth within the S&P 500 Index. The Magnificent Seven, a group of seven large tech companies, have been the primary drivers of the index’s gains for several quarters. However, the other stocks in the index are now projected to report their first profit growth since Q4 2022, reports Bloomberg.
Keith Lerner, co-chief investment officer at Truist Advisory Services, views this broader earnings strength as a positive development, offering more balanced market opportunities, according to the report.
Although over 80% of S&P 500 companies have reported their earnings, key indicators of U.S. consumer health, including Home Depot Inc., Walmart Inc., and Target Corp., are still to announce their numbers.
Their reports, along with that of AI giant Nvidia Corp., will be closely monitored for insights into consumer spending and potential economic slowdown.
Interestingly, the earnings growth is expanding beyond large-cap companies. Bloomberg Intelligence data shows that S&P 500 companies, excluding the Magnificent Seven, are set to grow their earnings by 7.4% in Q2, ending five consecutive quarters of decline.
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However, major AI players like Amazon.com Inc., Microsoft Corp., and Alphabet Inc. have reported disappointing outlooks, sparking concerns about the return on AI investments. This has led to speculation that companies may reduce AI projects to maintain margins, particularly if the economy weakens.
Despite the overall positive earnings, revenue misses have been more frequent this quarter. Companies reported revenue below estimates 21% of the time, compared to 20% a year ago.
Why It Matters: The shift in profit growth marks a significant change in the market dynamics. The broader earnings strength indicates a more balanced market, providing diversified opportunities for investors.
The upcoming reports from key consumer health indicators will provide further insights into the state of the economy and consumer spending.
However, the disappointing outlooks from major AI players and the increased frequency of revenue misses this quarter raise concerns about the sustainability of this profit growth.
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