Mag 7 Earnings Growth Trails the Rest of the S&P 500

The Magnificent Seven are on track to grow third-quarter profits by 29%, against 33.6% for the rest of the S&P 500 — the first time in years the "Other 493" would outpace the tech giants. The reversal, tracked by FactSet as of Oct. 30 with 60% of the index reporting, marks a turning point in a market that has leaned on mega-cap tech since the end of 2022.

The headline numbers still look strong. The S&P 500 as a whole is on track to report earnings growth of 31.3% for the third quarter, topping analyst estimates of 29.1% at the end of the quarter and marking the third consecutive quarter of profit growth above 25%. But the beats are leaner. In aggregate, companies have topped estimates by just 1.9% — the smallest positive surprise since the fourth quarter of 2022, according to FactSet. Revenue beats, in both share and magnitude, are trailing their one-year averages.

"When we look at the aggregate numbers, [they're] still pretty solid," says Michael Arone, chief investment strategist for State Street Investment Management. "Below the surface, some things suggest expectations were very high, and companies are struggling with beating those expectations."

What is punishing Big Tech?

Hyperscalers delivered accelerating cloud revenue but stumbled in their core businesses. Alphabet stock had its worst day on record after core search revenue growth slowed to 12%, against Wall Street estimates of nearly 15%. Amazon missed revenue estimates, triggering a Friday tech selloff. Meta and Microsoft fell even after broadly in-line results.

"It's almost a no-win situation for the Magnificent Seven in a lot of ways, because they're experiencing impossible comparisons to peak earnings growth rates," says Gina Martin Adams, chief market strategist for HB Wealth.

One-time charges played a role: Alphabet's profit was depressed by a nearly $9 billion decline in its equity portfolio's value, and Meta took a one-off $10 billion legal charge.

The deeper worry is cash. Massive AI capital expenditures have turned once-robust quarterly free cash flows negative, forcing giants to slow or halt buybacks and raise fresh capital. Even Microsoft — the sole hyperscaler still reporting positive free cash flow — announced plans to sell $25 billion of bonds, its first debt issuance since 2017. BlackRock Investment Institute strategists note the hyperscalers' incremental margins have fallen more than 12 percentage points over four quarters, to about 28%. "Each additional dollar of revenue is generating less additional profit," they wrote. Alphabet's miss was partly due to lower monetization of AI Mode searches versus conventional search.

Where does the rotation go from here?

The market has absorbed the shocks. The Morningstar US Large Cap Value Index rose nearly 6% over the last month, cushioning the Large Cap Growth Index's almost 7% decline; the Morningstar US Total Market Index is down about 1% this quarter. Over the past month, the equal-weight S&P 500 rose about 5% while the cap-weighted index slid 2%.

Investors now wrestle with "peak earnings" fears. "Consensus suggests that peak EPS growth is upon us," says Jeffrey Schulze, head investment strategist at Franklin Templeton Investment Institute, "but history shows that the peak itself is less important than where earnings settle afterward." Since 1980, the S&P 500 has returned nearly 20% on average the year after earnings growth peaked when growth stayed above 10%, versus 6% when it fell below. Next year, growth is expected to slow from 30% to about 19%.

"I'd be more concerned if there were indiscriminate selling based on what's been happening in the technology sector, but so far, that's not the case," Arone says. "Investors are recognizing the fact that, despite some of the headlines, the economy is expanding and earnings, even beyond tech, are growing solidly."

The takeaway: earnings growth is broadening, not collapsing, and strategists read that as a foundation for more sustainable gains.