The Tech Giants Keep Leading Earnings, but Is Change Coming?

Q3 2024 earnings season resembled other recent reporting periods for one key reason: all eyes remain fixed on the “Magnificent Seven” mega-cap technology companies.

In fairness, investor focus on the Magnificent Seven stocks has been warranted, as they provide some of the most sustainable growth performance across the entire market. In the Q3 reporting season, these companies generated impressive top- and bottom-line growth and also issued strong statements about forward earnings in the coming year.¹

For instance, Apple saw Q3 earnings increase +8.8% on +6.1% higher revenues. Microsoft’s Q3 earnings were up +10.7% on +16% higher revenues, while Meta’s earnings increased +35.4% on +18.9% revenue growth. The list goes on.

The chart below shows current consensus expectations for the ‘Mag 7’ stocks for the current and future periods, in the context of what they were able to achieve in the preceding period.

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The Magnificent 7: Quarterly Earnings and Revenue Growth Rate (YoY)

Below, readers can see the group’s earnings and revenue growth on an annual basis.

Earnings and Revenue Growth: The Mag 7

Beyond these ‘Mag 7’ players, total Q3 earnings for the Technology sector are expected to be up +19.3% from the same period last year on +11.4% higher revenues. In short, the tech giants continue to propel aggregate S&P 500 earnings higher, leading the way.

The question is whether this dominance is poised to continue.

We think the answer is yes. But it’s also important to remember that earnings growth across the S&P 500 is not a zero-sum game. As Technology continues to deliver strong relative earnings, other sectors can excel, too.

Technology Sector Earnings Growth Rates

To be fair, however, that hasn’t been the case yet. Excluding the earnings contribution from the Magnificent 7 group, Q3 earnings for the S&P 500 would be 1.3%. If you add the Mag 7 back in, the number jumps to a far more impressive +6.8%.

We think this dynamic is poised to change in 2025.

Estimates for future quarters suggest that earnings growth is poised to accelerate more broadly in the coming year, which we think means that additional opportunities for strong gains outside of Technology will continue to emerge as investors look ahead.

We saw early signs of this expanding market breadth in Q3. Small-cap stocks outperformed mid-and large-cap stocks, value outperformed growth, and sectors outside of Technology were the ones driving strong gains for the quarter (table below).

S&P 500 Sector	Q3 2024 Performance
Utilities	+19.4%
Real Estate	+17.2%
Industrials	+11.5%
Financials	+10.7%
Materials	+9.7%
Staples	+9.0%
Discretionary	+7.8%
Health Care	+6.1%
Communication Services	+1.7%
Technology	+1.6%
Energy	2.3%

Source: Strategas Research ³

Utilities were an interesting story in the quarter. The sector was beaten down in 2023, as capital- and investment-intensive businesses felt the pain of higher interest rates. The shifting outlook for interest rates in 2024 arguably helped drive a rebound this year, but investors have also been optimistic about surging demand tied to Artificial Intelligence. AI requires enormous amounts of computing power, which requires a lot of electricity. If the proliferation of AI-related spending takes hold as many anticipate it will, power demand could grow significantly. By some estimates, electricity demand from data centers alone could grow by 15% annually over the next decade.

The takeaway here is not that the AI trade has shifted from Technology companies to Utilities, but rather that rapidly growing demand and annual AI-driven capex of $500 billion to $1 trillion is likely to reverberate across the U.S. economy. In other words, the ‘Mag 7’ trade has arguably opened the door for new opportunities across the rest of the index.

Bottom Line for Investors

We believe in maintaining material exposure to the secular growth of the Technology sector, but we also maintain that owning a diversified portfolio with exposure to other sectors and asset classes as well. 2025 offers a good setup for this diversified approach, in our view, as the ‘Mag 7’ stocks prepare to hand the leadership torch to “the other 493” stocks in the S&P 500.

Most investors can get where they need to go over the long term by owning a diversified portfolio of stocks and/or ETFs. In fact, “diversify your portfolio” is one the most basic pieces of investing advice. Sadly, in our experience many investors still put all (or most) of their eggs in one basket.

At Zacks Advantage, we strive to help every investor properly allocate their assets. In fact, we’ve put together a helpful guide to help you understand the basics of portfolio diversification, including:

• 4 myths of a properly diversified portfolio
• Why the average investor’s returns trail almost every other investment category
• How to create a truly well-diversified portfolio

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¹ Zacks.com. November 1, 2024.

² Zacks Investment Management may amend or rescind the Is Your Investment Portfolio Actually Well-Diversified? guide offer for any reason and at Zacks Investment Management’s discretion.

³ Strategas Research.

⁴ Zacks Investment Management may amend or rescind the Is Your Investment Portfolio Actually Well-Diversified? guide offer for any reason and at Zacks Investment Management’s discretion.

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