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The broadening of the stock market rally has become a crucial theme in the second half of 2024.
Amid the onset of rate cuts — and with economic data showing that the U.S. economy is in better shape than initially feared — the recent push for new all-time highs has largely been about companies that aren’t Apple (AAPL), Alphabet (GOOGL, GOOG) , Microsoft (MSFT), Amazon (AMZN), Meta (META), Tesla (TSLA) or Nvidia (NVDA).
But the debate over whether the next move in the market will be led by just a few big tech companies – as was the case in 2023 and early 2024 – continues among investors.
In a note Friday, data from FactSet showed that earnings for the 493 companies in the S&P 500 outside the “Magnificent Seven” are expected to grow by an average of more than 13% over the next five quarters. Conversely, the Magnificent Seven is expected to see earnings grow by an average of almost 19% over the same period.
This mainly means an increase in growth for the 493 from 2024 and a lot lower for the Magnificent Seven. This more positive trend in the 493 is one reason why strategists have called for a further broadening of the rally. But as the chart below shows, the difference in trend growth is a narrowing variety.
And some believe Big Tech could still be the winner.
“The Mag 7 is still expected to deliver superior (and presumably more reliable) earnings growth than the rest of the index,” said Nicholas Colas, co-founder of DataTrek.
Colas noted that this data suggests technology should “catch up through the end of the year,” as the tech-heavy Nasdaq 100 (^NDX) has underperformed the S&P 500 over the past month and into 2024.
“Going forward, the path to outperformance will involve assessing whether Big Tech or the rest of the S&P 500 will exhibit better earnings momentum,” Colas wrote. “If you believe that US GDP growth could reach +3% by 2025, then the S&P 493 is probably the better bet. Our own view is that growth will be more modest, giving Big Tech an edge.”
Some of the technological revival may already be happening. Nvidia rose to a new all-time high last month, its first since June. Shares of Apple closed at a record high of $235 per share on Friday and added to those gains on Monday. Netflix (NFLX), the first of the big tech giants to report earnings, saw a huge rally in its shares to a new all-time high after another impressive round of earnings.
That move by the streaming giant is perhaps the most illuminating when you consider that Big Tech has to lead the market. Even Netflix, which had already seen its shares rise more than 50% year-over-year, managed to positively surprise Wall Street.
Perhaps this serves as an early reminder that while growth in technology is expected to slow from the rapid pace of the past year, that doesn’t mean there can’t be upside surprises – or that technology still can’t outperform. For the empirical evidence, look no further than the past 18 months, when many tech revenue reports came in better than expected.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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