Magnificent Seven’s Earnings Have Peaked, BofA Says

The Magnificent Seven, the moniker assigned to a group of technology-focused mega-cap companies, aided by exceptional earnings and excitement over artificial intelligence, have long been the stock market’s leaders.

But those earnings peaked in the December-ending quarter, and the March-ending period, now reporting, will begin to show the slowdown, according to Bank of America researchers. “All seven companies are expected to see either decelerating EPS or an EPS decline” year over year, per an earnings study, written by Savita Subramanian and Ohsung Kwon, equity and quant strategists at BofA Securities.

How come? Tech stocks in general and the Mag Seven, in particular, went through a cost-cutting binge in 2023 as the result of the Federal Reserve’s boosting of interest rates and fears of an impending recession, which did not appear. And that spurred a rise in earnings per share over the last two to three quarters. But now, BofA contended, that accelerant has played out.

The group collectively enjoyed a 63% EPS advance in 2023’s final quarter, but BofA estimated earnings would slow to 39% for the quarter that wrapped up in March 2024. Not too shabby, except there’s a slower pace.

To the BofA researchers, high Mag Seven earnings have helped propel their stock prices to unsustainable levels. Somewhat less-lofty earnings could bring their stocks down to a more reasonable balance, the thinking goes. Over the last 12 months, the Magnificent Seven’s stocks are up 68%, while the those of the S&P 500 are ahead 24%.

The first of the Mag Seven to report was Tesla, on Tuesday: The electric vehicle maker saw its EPS halved in this year’s first three months, to 34 cents, amid tepid car sales. The carmaker’s stock, beaten down this year, did rally on Wednesday despite the profit and sales slumps, on CEO Elon Musk’s announcement that cheaper models of its EVs would roll out sooner than had been anticipated.

On Wednesday, Meta Platforms, the second member of the storied seven-company roster to report, seemed to bolster BofA’s thesis. Facebook-parent Meta had EPS of $4.71, double what it generated in the year-before quarter. But this was below the December-ending quarter’s $5.33, its best percentage increase since 2016.

Meta’s shares slid 15% in after-hours trading once the earnings release came out. Before Wednesday’s close, the stock had been up 39% this year. The market evidently was disappointed that the company’s estimated revenue for its second quarter, while robust, fell short of analysts’ projections.

The rest of the Seven will report over the next few weeks. Alphabet and Microsoft unveil their earnings today, Thursday, after the market closes. Amazon is out next Tuesday, April 30, and Apple next Thursday, May 2. Nvidia is the last, Wednesday, May 22.

What about the other 493 S&P 500 stocks? The non-tech companies in the 493 are only now turning to cost cutting, BofA indicated. Hence, their EPS should improve up ahead. As the BofA report put it, “We believe the cost-cutting efforts should lead to better margin upside for the other 493 in 2024-25.”