At initial glance, the third quarter seems relatively unimpressive for the 'Magnificent Seven' tech titans – Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), Nvidia (NVDA), Meta Platforms (META), and Tesla (TSLA). They reported an 18.4% earnings growth, marking the slowest growth rate since Q1 of 2023. However, FactSet Research analyst John Butters warns that this number includes a $16 billion tax charge, making Meta's profit appear significantly lower. Without this one-time charge, the growth rate would be a comfortable 30%, outpacing analyst predictions and even exceeding the previous quarter's 26% growth.
The commonly underestimated Magnificent Seven has been the backbone of S&P 500's earnings growth for many years. With the continued investment in AI infrastructure by Microsoft, Amazon, Meta, and Alphabet, these companies consistently exceed expectations. Despite initial concerns from investors that AI spending could be a liability, LPL Financial analysts predict that these investments will fuel corporate profits. Nvidia, the leader in the AI chip market, provides the best example as it recently surpassed estimated sales, profit, and earnings outlook.
However, Wall Street's concerns about overspending on AI technology, reminiscent of the 1990s Dotcom Bubble, persist. High capital expenditure reaching almost 25% of revenue and draining free cash flows have made some investors uneasy. LPL's analysts suggest that proof of return on investment may be demanded in the future.
As Wall Street adjusts its predictions, it foresees an average earnings growth of 21% for the Mag 7 over the upcoming year, a marked improvement from the 15% anticipated at the end of August. Of the Magnificent Seven stocks, only Alphabet and Nvidia have outperformed the S&P 500's 16% increase this year, boasting a 66% and 33% rise respectively.