Global Finance | 18 March 2024

Earnings season: ‘Magnificent 7’ steal the show

During a somewhat bleak earnings season, the US tech giants managed to salvage some positivity for stock markets in the first quarter of the year.

It’s that time of year again. The one that investors and analysts have been waiting for: the first earnings season of the year. Each quarter, companies report on how well their businesses have performed in terms of revenue and profits over the previous three months.

This latest round of updates covers the last three months of 2023 – a challenging environment for companies in both the US and Europe, with rising interest rates and sticky inflation.

But the technology sector has given investors something to cheer about, with a little helping hand from artificial intelligence (AI).

US outpaces Europe

The US earnings season has been slightly more positive than its European counterpart, primarily driven by the “Magnificent 7” tech stocks – Amazon, Apple, Alphabet, Meta, Microsoft, Tesla, and most importantly Nvidia. These tech giants’ market value accounts for roughly 30% of the S&P 500, with the remaining 493 stocks only accounting for 70% of it.

The reason behind the Magnificent 7’s thriving earnings season is the continued excitement around AI. With most of the seven stocks showing significant focus on this technology, there’s high demand for their products and services, and that’s translated to strong earnings. Nvidia especially has a stronghold on the development of chips used for AI technology.

However, Howard Sparks, Senior Equity Specialist at Coutts, explains that this has left the US earnings season rather lopsided.

“The Magnificent 7 are on track for 56% earnings growth from this time last year,” he says. “But the remaining ‘Un-magnificent 493’ stocks of the S&P 500 are expecting an earnings decline of 6%.”

Ahead of each company’s announcement, analysts predict how they’ll do. The companies will then either beat, equal or fall below the average of these expectations. In relative terms, 78% of companies that have made announcements at the time of writing have beaten expectations, which is line in with previous years. But it’s worth noting that expectations weren’t very high to begin with.

“The economic environment in Europe has been more challenging than the US. In the last few months we’ve seen the UK fall into a technical recession, and inflation is proving stubborn across the eurozone.”

Howard Sparks, Senior Equity Specialist, Coutts

Europe missing out on tech dominance

Europe’s earning season has been a little less rosy, with only 44% of companies reporting that they beat expectations so far, according to Bank of America. This is compared to the region’s long-term average of 55%, making it Europe’s second worst earnings season for 10 years, according to data from Bank of America.

Howard says: “The economic environment in Europe has been more challenging than the US. In the last few months we’ve seen the UK fall into a technical recession, and inflation is proving stubborn across the eurozone.”

Another factor behind the difference in announcements across the US and Europe (particularly the UK) is the sector makeup of each region. As explained in our Investment Outlook 2024, technology has been dominating market performances and is the largest sector in the US.

But on the other side of the Atlantic, the sector has a much smaller market share. Instead, energy and banks top the table in the UK, but these stocks have been struggling in the face of falling oil prices and high interest rates.

Pays to be a stock picker

2024 will be a pivotal year for actively managed funds and stock pickers. The combination of the US market being dominated by a select few stocks – in market weight and performance – and Q1 earnings having low expectations means there’s a lot of opportunity for stocks to outperform.

The main question is: which ones?

As we also explained in our Investment Outlook, we see active management coming back in style given the backdrop. So far, it looks like active managers are having a good 2024.

Howard explains: “Passive investing, which typically involves investing in the largest companies within a specific sector or region, includes index funds and Exchange Traded Funds – and they’ve been tough to beat in the past few years.

“But based on published fund holdings data, many institutional investors appear to have significant holdings in the large cap technology stocks that have led market performance in recent months, notably the Magnificent 7.”

The value of investments can fall as well as rise and you may not get back what you put in. Past performance should not be seen as an indication of future performance. You should continue to hold cash for your short-term needs.

The above article has been written and published by Coutts Crown Dependencies investment provider, Coutts.