Following the inauguration of the new US president, investors are eagerly anticipating the upcoming earnings season. While the “Magnificent Seven” – Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla, and Meta – are expected to deliver strong results, it is the remaining 493 companies in the S&P 500 that are increasingly catching attention with improving earnings.
Consensus estimates suggest the Magnificent Seven will post an average year-on-year earnings growth of 21.7 percent for the fourth quarter. Stripping out these tech heavyweights, the remaining S&P 500 companies are projected to record a 9.7 percent earnings growth – the highest since the second quarter of 2022, according to FactSet data.
Marco Pirondi, CIO of Amundi US, highlights the opportunities beyond the tech giants. “Investors should consider equal-weighted indices in the US,” he said in comments to Investment Officer.
Strong S&P 500 earnings growth expected
Despite the drag of high interest rates on valuations, corporate earnings growth remains the primary driver of share prices for 2025, many analysts believe. “It’s hard to be short-term pessimistic on earnings. The trajectory of estimates looks reasonable given the robust economic data,” noted Michael Purves, CEO of Tallbacken Capital Advisors.
Record flows into Equal-Weight ETFs
Investors are also shifting strategies. Funds like the Invesco S&P 500 Equal Weight ETF have seen inflows of 17 billion dollars in 2024, with 14.4 billion dollars coming in the second half alone, per Morningstar data. This marks a striking move, given that equal-weighted indices have underperformed the traditional S&P 500 for years, largely due to their reduced reliance on the gains of the largest companies.
This year, however, the trend is reversing. The equal-weighted S&P 500 is up 4 percent year-to-date, outpacing the traditional index’s 2.5 percent gain. “Equal-weight indices inherently rebalance by buying low and selling high,” explained Dmitrii Ponomarev of VanEck. “This contrarian approach helps mitigate bubble risks and excessive price swings.”
Resilient corporate performance
Analysts forecast the Magnificent Seven will achieve a combined earnings growth of over 17 percent in the coming four quarters. The rest of the S&P 500 is expected to grow earnings by more than 9 percent annually during the same period, contributing to a projected double-digit overall growth for the index throughout 2025.
The financial sector stands out, with anticipated quarterly earnings growth of 39.5 percent. Tesla, however, may lag behind its peers, grappling with falling EV prices and rising costs, potentially leading to a net income decline in Q4 2024.
Peak optimism or bubble risk?
Not everyone is convinced the current optimism will endure. Sean Peche, portfolio manager at Ranmore Fund Management, warns of “peak optimism.” He suggests that the intense focus on US tech giants could inflate valuations to unsustainable levels. “Perhaps this is the first party in history that never ends,” Peche said, “but the likelihood of disappointment is high.”
His caution aligns with recent insider selling, which hit its second-highest level since 2004 in December, according to Veridata. Peche is exploring opportunities in mid-caps, small-caps, and emerging markets like Brazil, where equities fell 30 percent last year. Ranmore’s largest position is ABN Amro, which holds a price-to-earnings ratio of just 7, compared to 19 for the MSCI World Index.
Signs of short-term overexuberance
Londonesque analysis also points to overheating risks. Longview Economics flagged increased put/call ratios as signs of short-term overexuberance. “The case for shorting the S&P 500 is strengthening,” they wrote, though they acknowledged the risks posed by potential policy surprises that could lift sentiment.
The first of the Magnificent Seven to report results will be Tesla, Meta, and Microsoft on 29 January, followed by Apple on 30 January and Alphabet the following week. Amazon and Nvidia will release earnings on 6 February and 26 February, respectively. Investors will be watching closely to see if the broader market can maintain its momentum alongside tech.