Investors are hoarding cash, a tidal wave of non-tech earnings is quietly rising, and 3 other fascinating takeaways from JPMorgan Asset Management’s mid-year outlook

2. A broad earnings rebound is beginning with the Magnificent 7 set to slow down

Mega-cap growth stocks, which have long driven the S&P 500, took a brutal blow in 2022, which was the worst year for equities since 2008. A septet of large-cap leaders — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — saw their earnings shrink 14% that year while the other S&P 500 members enjoyed 9% growth.

Since then, those technology titans have crushed the rest of the market in earnings growth and returns. Stocks in the so-called Mag 7 grew earnings by 31% last year and are on pace to post similarly strong profits this year. By contrast, the other 493 stocks in the S&P 500 saw their earnings fall in 2023.

Even more astounding is that Mag 7 stocks accounted for 89% of the S&P 500’s return in 2023, compared to 65% in 2019, Santos noted. The market is undoubtedly top-heavy, and though that may not lead to disaster, it likely isn’t sustainable either.

“We don’t think it’s a bubble,” Santos said at the event. “We do think there are positive reasons for them to keep going up. It’s just that it’s too outsized in terms of contribution.”

The Magnificent 7 no longer trades like a monolith, as Nvidia and Microsoft have separated from laggards like Tesla this year. But for simplicity’s sake, JPMAM strategists still compared the cohort to the rest of the S&P 500, and their earnings projections for the groups are startling.

According to JPMAM, the long-standing gap between Magnificent 7 firms and the “S&P 493” will narrow in the coming quarters and then be eliminated entirely. The firm is calling for 17% earnings growth in the fourth quarter, both for stocks in and out of the Magnificent 7. That would be a significant improvement for non-Mag 7 firms, which slid about 2% to start the year.

All 11 market sectors will enjoy earnings growth in Q4 for the first time since Q2 of 2021, according to JPMAM’s projections. That includes healthcare, energy, and materials, which saw earnings decline earlier this year.