(Bloomberg) -- The seemingly unstoppable US stock market continues to rise despite Big Tech’s slump, as the gains diversify to industry groups like real estate that struggled through the first half of the year.
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The same, however, cannot be said for corporate profits. And that raises a question about how long the breadth of the rally can stay strong.
“The rally might be broadening out in terms of the action in the stocks,” said Matt Maley, chief market strategist at Miller Tabak + Co. “But it’s not broadening out in the overall earnings picture.”
Earnings for companies in the S&P 500 Index are expected to climb 4.3% from a year ago. But strip out the so-called Magnificent Seven mega tech companies — Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc. — and the anticipated profit expansion nearly disappears, according to data compiled by Bloomberg Intelligence. Take out tech and communications more broadly, and the growth turns negative.
The outlook demonstrates just how reliant Corporate America remains on the technology profit machine. And it points to the pressure building on other industries to pick up at least some of the slack.
“The strongest earnings growth visibility is still coming from tech and communication services and parts of consumer discretionary sectors,” said Scott Chronert, head of US equity strategy research at Citigroup. “We need both — an ongoing conviction in earnings growth for the ‘growth’ cohort, and an ongoing improvement in trends for other sectors.
Looking at stock market returns, investors would be forgiven for thinking the rest of the equity universe is already posting strong results. While Big Tech drove the S&P 500 higher through the first half, sending their market valuations to record highs, things shifted in the third quarter as other sectors beat the growth giants.
In the third quarter, the Bloomberg Magnificent 7 Index trailed the equal-weight version of S&P, in which the weighting of each stock is the same regardless of the company’s market capitalization, for the first time since 2022. Within the S&P 500, utilities, real estate and financials have been the dominant sectors since the start of July, while information technology and communications services are barely in the green.