The Magnificent Seven make up more than 25% of the S&P 500 by market cap and five of them (Alphabet (GOOG), Microsoft (MSFT), Meta (META), Amazon (AMZN), Apple (AAPL)) report earnings this week.
Couple that with the fact that the presidential election and Fed meeting both arrive next week and this is arguably the most important earnings week in 2024.
Should these high-flying tech stocks solidly beat earnings estimates they’ll lay the groundwork for continued outperformance and help set a bullish tone heading into two events that could have major economic implications.
If mega-cap tech is still firing on all cylinders, the AI narrative should remain intact, and traders would be more likely to look past any speedbumps on the path to lower rates.
If earnings miss expectations, however, it’ll reinforce questions about the returns other companies have derived from AI, which have become increasingly common on earnings calls for chipmakers.
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As you can see in the chart from Yardeni Research below, the valuations of the Magnificent Seven (Yardeni uses the MegaCap-8, which adds Netflix (NFLX)) have been divorced from their relative share of earnings. As their market caps have grown, their earnings have failed to keep pace.
As of October 25, the MegaCap-8 comprise 29.6% of the total value of the S&P 500 but are responsible for only 21.1% of forward earnings, which means investors have continued to bid up shares in anticipation of growth far into the future (beyond the next 12 months).
That 8.5% “spread” isn’t the largest spread between forward earnings share and market cap that we’ve seen (it was above 10% at the end of 2021), but as we saw in 2022, if the market begins pricing out massive earnings growth, it can result in big price moves in the underlying stocks.
The 2022 bear market cut that spread in half but saw Magnificent Seven companies lose anywhere from 25% (Apple, Microsoft) to 60% (Meta) of their value.
That’s not to say we should expect huge corrections if these companies disappoint on earnings, but it should highlight some of the vulnerabilities of a concentrated market whose biggest drivers are trading well beyond what their fundamentals may reasonably support.
So, with the scene set, let’s take a closer look at what the market is expecting from Magnificent Seven earnings this week as well as a few “wildcards” that could change the cadence of the earnings calls.
Each of these announcements will take place after the market close on that day.
This Week’s Magnificent Seven Earnings Calendar
Tuesday, October 29:
Alphabet (GOOG)
Expected EPS: $1.85
Expected Revenue: $86.2 billion
Analysts are expecting $1.85 in earnings per share on revenues of $86.2 billion when Alphabet reports on October 29.
Last quarter, Alphabet beat on both fronts, with revenues coming in slightly ahead of expectations and a solid earnings beat of $1.89 compared to expectations of $1.84.
The wildcard: Google was found to be a monopoly earlier this year and their former head of search, Prabhakar Raghavan, has recently stepped away from the search business to serve as the company’s Chief Technologist. Management’s commentary on either event could surprise investors.
Wednesday, October 30:
Microsoft (MSFT)
Expected EPS: $3.10
Expected Revenue: $64.6 billion
Analysts are expecting $3.10 in earnings per share on revenues of $64.6 billion when Microsoft reports on October 30.
Last quarter, Microsoft beat earnings and revenue expectations, although just barely (by 0.23% and 0.45%, respectively).
The wildcard: Microsoft aggregates their earnings from AI initiatives into their overall Cloud Computing unit and, while we’re not expecting it, any additional granularity on how much they’re making from artificial intelligence could shed a lot of light on if AI is profitable for anybody other than Nvidia (NVDA).
Meta Platforms (META)
Expected EPS: $5.27
Expected Revenue: $40.3 billion
Analysts are expecting $5.27 in earnings per share on revenues of $40.3 billion when Meta Platforms reports on October 30.
Last quarter, Meta beat expectations by 7.8% with earnings of $5.16 coming in ahead of expectations of $4.78. Revenues also beat by 2%.
The wildcard: Meta was massively rewarded for their “year of efficiency” in 2023 (and beyond), but Meta Ray Bans and a renewed push into augmented and virtual reality (AR and VR) could recall ghosts of the “Metaverse.” Conversely, the Ray Bans in particular could present an opportunity to show AI being injected more effectively into real life. (We called this “the wildcard” for a reason.)
Thursday, October 31:
Amazon (AMZN)
Expected EPS: $1.14
Expected Revenue: $157.3 billion
Analysts are expecting $1.14 in earnings per share on revenues of $157.3 billion when Amazon reports on October 31.
Last quarter, Amazon beat on earnings (by 24%; $1.26 against $1.02 expected) but missed revenue expectations by 0.5%.
The wildcard: Amazon’s Project Kuiper. Project Kuiper, which has been in the works for years, is a satellite-based broadband internet service intended to rival SpaceX’s Starlink. And it won’t be cheap. In the last four years, estimates for the initial cost to put 3,000-plus satellites into orbit have risen from around $10 billion to $16-20 billion. There’s a lot of potential upside if they’re successful, as a recent report from analytics firm Quilty estimates it could drive as much as $36 billion in annual revenue should Amazon hit a 100-million-subscriber threshold.
But investors tend to not have much patience for high-cost vanity projects that divert companies from their core businesses (like the Metaverse), and cost overruns would raise fresh questions about whether Kuiper is worth the investment.
Apple (AAPL)
Expected EPS: $1.55
Expected Revenue: $94.4 billion
Analysts are expecting $1.55 in earnings per share on revenues of $94.4 billion when Apple reports on October 31.
Last quarter, Apple beat on both the top and bottom lines (by 1.7% and 4.4%, respectively).
The wildcard: iPhone 16 sales and Apple Intelligence. iPhone sales are Apple’s bread and butter and there have been rumors that the launch of Apple Intelligence has not been the big sales driver Apple was hoping for, with an analyst for KGI Securities recently writing that Apple cut orders for about 10 million base iPhone 16s for the back half of the year.
That could point to disappointing sales numbers (although the analyst noted that it may not be reflected until Q4), which could temper expectations and weigh on shares.
Of the Magnificent Seven stocks, I remain of the opinion that Apple’s conservative, low-cost approach to AI puts them in the best position once investors begin clamoring for proof that all of this spending on artificial intelligence is reaching the bottom line.
Will that reach a fever pitch this week? Probably not, but the Magnificent Seven earnings week should have some fireworks nonetheless.
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