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Key Takeaways
- S&P 500 companies this earnings season have exceeded earnings estimates at a below-average rate and a narrower-than-average margin.
- Mentions of the “bottom” of the business cycle have surged on earnings calls while references to weak demand have declined, possibly signaling an inflection point for corporate earnings.
- Five of the Magnificent Seven will report earnings this week, with AI spending and monetization a likely focus for Wall Street.
Corporate earnings are lagging a key historical average so far this season. That could change this week, with about a quarter of the S&P 500—including five of the hugely profitable Magnificent Seven companies—set to report results.
As of Friday evening, 75% of the S&P 500 companies that had reported third-quarter profit results had beaten Wall Street’s expectations, slightly less than the five-year average, according to data from FactSet Research. In the aggregate, earnings have exceeded expectations by almost 6%, more than two percentage points below average.
FactSet’s senior earnings analyst, John Butters, estimates that the S&P 500 as a whole grew earnings by 3.6% last quarter. That would represent the benchmark index’s fifth consecutive quarter of growth, though it would also mark its slowest growth rate of any of those quarters.
Those results may have been underwhelming, but Bank of America analysts note that earnings calls tell a slightly different story. Mentions of weak demand have fallen to a two-year low, and mentions of “bottom”—a reference to the bottom of the business cycle—have jumped more than 50% from this time last year.
“Historically, a jump in ‘bottom’ mentions has often marked an inflection in EPS,” the analysts wrote in a note on Monday.
Magnificent Seven Earnings on Deck
This week has the potential to change the overall outlook, with companies accounting for nearly half of the S&P 500’s total earnings set to report.
This week’s marquee reports will come from Big Tech, starting on Tuesday when Google parent Alphabet (GOOG; GOOGL) reports after the closing bell. It will be followed by Microsoft (MSFT) and Meta Platforms (META) on Wednesday, then Apple (AAPL) and Amazon (AMZN) on Thursday. (Tesla (TSLA) reported last week, while Nvidia’s (NVDA) announcement is expected next month.)
Taken together, the group is expected to report its slowest pace of earnings growth (+19%) since the beginning of 2023, according to BofA estimates. Still, nearly 20% growth far outpaces the rest of the index, which without the Magnificent Seven is forecast to report growth of just 1%.
The focus for Wall Street will likely again be investment in artificial intelligence. Tech giants are forecast to increase their capital expenditures by 40% this year as they spend heavily on the infrastructure required to train and run AI models.
Last earnings season, executives insisted that the risks of underinvesting in AI were far greater than the risks of overinvesting. Still, the sheer size of their investments unnerved investors and weighed on tech stocks then.