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Does Mag 7 Leadership Remain Intact Post-Tesla and Meta Disappointments?
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We have Apple and Amazon on deck to report Q1 results this week, and we will need to wait a few more weeks before we see Nvidia’s numbers. But we have already seen Q1 results from the other four members of the ‘Magnificent 7’ group: Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) , Meta (META - Free Report) , and Tesla (TSLA - Free Report) .
It is hard to find any weakness in the Microsoft and Alphabet reports, and the market’s reaction to these two reports shows that investors agree with that assessment. The Alphabet report appears to reassure investors that it has a credible AI strategy in place and may not be that far behind Microsoft in this critical race.
The market reaction to the Tesla and Meta reports needs to be contextualized.
Meta shares were very strong performers prior to this report, and any way you look at the company’s Q1 results, they are impressive. Meta’s Q1 earnings were up +80.5% from the year-earlier period on +27.3% higher revenues. Investors’ beef with the Meta report is the company’s guidance for capital expenditures, which is going up significantly to strengthen the company’s AI capabilities.
I think the reaction is overdone, but it likely reminds investors of the pain created by the company’s earlier metaverse plans. Perhaps there is a basis for those worries, given the metaverse history. But as we are seeing with Microsoft and Alphabet, leadership in AI requires a lot of spending. If market participants are okay with Microsoft and Alphabet spending hands-over-fist on AI, then they should also be okay with Meta.
Tesla shares have been the worst performing of the group, with many starting to speak out that perhaps it didn’t deserve to be part of this group. The stock price weakness reflects the steadily deteriorating earnings outlook, with a combination of softening demand and heightened competitive pressures forcing Elon Musk to cut prices. You can see this in the chart below, which plots the stock price relative to how EPS estimates for this year and next have evolved.
Image Source: Zacks Investment Research
Given this stock’s price action and estimates revision trajectory coming into the quarterly release, investors were conditioned to expect the worst from Tesla, but the actual results were simply bad (instead of ‘very bad’). They missed on the top- and bottom lines and didn’t provide any favorable or reassuring commentary about the outlook. But investors were relieved that the numbers weren’t as ugly as they had started fearing.
Tesla shares are still laggards relative to other Mag 7 stocks, as the year-to-date performance chart shows.
Image Source: Zacks Investment Research
Using estimates for Amazon, Apple, and Nvidia, which will release their March-quarter results on April 30th, May 2nd, and May 22nd, respectively, and actual results for the other four members of the group, total Q1 earnings for the group are expected to be up +43.7% from the same period last year on +13.2% higher revenues.
The chart below shows the group’s Q1 earnings and revenue growth performance in the context of what we saw from the group in the preceding quarter and what is currently expected for the next three quarters.
Image Source: Zacks Investment Research
The chart below shows the group’s earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
Please note that the Mag 7 companies currently account for 29.1% of the S&P 500 index’s total market capitalization and are expected to bring in 20.6% of the index’s total earnings in 2024. For 2023 Q4, the Mag 7 group has a bigger weightage, bringing in 21.6% of all S&P 500 earnings.
The chart below shows the group’s earnings contribution to the index over time and what is currently expected for the next two years.
Image Source: Zacks Investment Research
Given the group's enormous earnings power and growth profile, it is hard to argue with its market leadership.
Beyond these mega-cap players, total Q1 earnings for the Technology sector as a whole are expected to be up +27.1% from the same period last year on +8.7% higher revenues.
The chart below shows the sector’s Q4 earnings and revenue growth expectations in the context of where growth has been in recent quarters and what is expected in the coming four periods.
Image Source: Zacks Investment Research
Earnings Season Scorecard and This Week’s Earnings Reports
We remain in the heart of the Q1 earnings season this week, with more than 950 companies reporting results, including 177 S&P 500 members. In addition to the aforementioned Apple and Amazon reports, we literally have a representative cross-section of the market on deck to report results this week.
Through Friday, April 26th, we have seen Q1 results from 229 S&P 500 index members, or 45.8% of the index’s total membership. Total Q1 earnings for these 229 index members are up +2.8% from the same period last year on +3.3% higher revenues, with 78.2% beating EPS estimates and 59.8% beating revenue estimates.
The comparison charts below put the Q1 earnings and revenue growth rates in a historical context.
Image Source: Zacks Investment Research
The comparison charts below put the Q1 EPS and revenue beats percentages in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
Looking at Q1 as a whole, total S&P 500 earnings are expected to be up +3.8% from the same period last year on +3.7% higher revenues, which would follow the +6.8% earnings growth on +3.3% revenue gains in the preceding period.
The chart below shows current earnings and revenue growth expectations for 2024 Q1 in the context of where growth has been over the preceding four quarters and what is currently expected for the following three quarters.
Image Source: Zacks Investment Research
Looking at the overall earnings picture on an annual basis, total 2024 S&P 500 earnings are expected to be up +8.3% on +1.7% revenue growth.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>> Breaking Down Q1 Earnings Results
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Does Mag 7 Leadership Remain Intact Post-Tesla and Meta Disappointments?
We have Apple and Amazon on deck to report Q1 results this week, and we will need to wait a few more weeks before we see Nvidia’s numbers. But we have already seen Q1 results from the other four members of the ‘Magnificent 7’ group: Alphabet (GOOGL - Free Report) , Microsoft (MSFT - Free Report) , Meta (META - Free Report) , and Tesla (TSLA - Free Report) .
It is hard to find any weakness in the Microsoft and Alphabet reports, and the market’s reaction to these two reports shows that investors agree with that assessment. The Alphabet report appears to reassure investors that it has a credible AI strategy in place and may not be that far behind Microsoft in this critical race.
The market reaction to the Tesla and Meta reports needs to be contextualized.
Meta shares were very strong performers prior to this report, and any way you look at the company’s Q1 results, they are impressive. Meta’s Q1 earnings were up +80.5% from the year-earlier period on +27.3% higher revenues. Investors’ beef with the Meta report is the company’s guidance for capital expenditures, which is going up significantly to strengthen the company’s AI capabilities.
I think the reaction is overdone, but it likely reminds investors of the pain created by the company’s earlier metaverse plans. Perhaps there is a basis for those worries, given the metaverse history. But as we are seeing with Microsoft and Alphabet, leadership in AI requires a lot of spending. If market participants are okay with Microsoft and Alphabet spending hands-over-fist on AI, then they should also be okay with Meta.
Tesla shares have been the worst performing of the group, with many starting to speak out that perhaps it didn’t deserve to be part of this group. The stock price weakness reflects the steadily deteriorating earnings outlook, with a combination of softening demand and heightened competitive pressures forcing Elon Musk to cut prices. You can see this in the chart below, which plots the stock price relative to how EPS estimates for this year and next have evolved.
Image Source: Zacks Investment Research
Given this stock’s price action and estimates revision trajectory coming into the quarterly release, investors were conditioned to expect the worst from Tesla, but the actual results were simply bad (instead of ‘very bad’). They missed on the top- and bottom lines and didn’t provide any favorable or reassuring commentary about the outlook. But investors were relieved that the numbers weren’t as ugly as they had started fearing.
Tesla shares are still laggards relative to other Mag 7 stocks, as the year-to-date performance chart shows.
Image Source: Zacks Investment Research
Using estimates for Amazon, Apple, and Nvidia, which will release their March-quarter results on April 30th, May 2nd, and May 22nd, respectively, and actual results for the other four members of the group, total Q1 earnings for the group are expected to be up +43.7% from the same period last year on +13.2% higher revenues.
The chart below shows the group’s Q1 earnings and revenue growth performance in the context of what we saw from the group in the preceding quarter and what is currently expected for the next three quarters.
Image Source: Zacks Investment Research
The chart below shows the group’s earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
Please note that the Mag 7 companies currently account for 29.1% of the S&P 500 index’s total market capitalization and are expected to bring in 20.6% of the index’s total earnings in 2024. For 2023 Q4, the Mag 7 group has a bigger weightage, bringing in 21.6% of all S&P 500 earnings.
The chart below shows the group’s earnings contribution to the index over time and what is currently expected for the next two years.
Image Source: Zacks Investment Research
Given the group's enormous earnings power and growth profile, it is hard to argue with its market leadership.
Beyond these mega-cap players, total Q1 earnings for the Technology sector as a whole are expected to be up +27.1% from the same period last year on +8.7% higher revenues.
The chart below shows the sector’s Q4 earnings and revenue growth expectations in the context of where growth has been in recent quarters and what is expected in the coming four periods.
Image Source: Zacks Investment Research
Earnings Season Scorecard and This Week’s Earnings Reports
We remain in the heart of the Q1 earnings season this week, with more than 950 companies reporting results, including 177 S&P 500 members. In addition to the aforementioned Apple and Amazon reports, we literally have a representative cross-section of the market on deck to report results this week.
Through Friday, April 26th, we have seen Q1 results from 229 S&P 500 index members, or 45.8% of the index’s total membership. Total Q1 earnings for these 229 index members are up +2.8% from the same period last year on +3.3% higher revenues, with 78.2% beating EPS estimates and 59.8% beating revenue estimates.
The comparison charts below put the Q1 earnings and revenue growth rates in a historical context.
Image Source: Zacks Investment Research
The comparison charts below put the Q1 EPS and revenue beats percentages in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
Looking at Q1 as a whole, total S&P 500 earnings are expected to be up +3.8% from the same period last year on +3.7% higher revenues, which would follow the +6.8% earnings growth on +3.3% revenue gains in the preceding period.
The chart below shows current earnings and revenue growth expectations for 2024 Q1 in the context of where growth has been over the preceding four quarters and what is currently expected for the following three quarters.
Image Source: Zacks Investment Research
Looking at the overall earnings picture on an annual basis, total 2024 S&P 500 earnings are expected to be up +8.3% on +1.7% revenue growth.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>> Breaking Down Q1 Earnings Results