The Magnificent 7 Are Losing Their Earnings Edge. Is the Market Entering a New Phase?
For much of the past few years, the Magnificent 7 have dominated the US stock market. Their leadership has been supported by strong earnings growth, enormous cash reserves, global market positions and, more recently, the rapid expansion of artificial intelligence.
However, the latest third-quarter earnings estimates are raising an interesting question: Is the earnings advantage of these seven technology giants beginning to narrow?
According to FactSet earnings analyst John Butters, the blended EPS growth rate for the Magnificent 7 has fallen to 22.6%, compared with 33.6% a month earlier. More surprisingly, the other 493 companies in the S&P 500 are now expected to deliver 32.6% earnings growth.
In other words, the broader market is currently expected to grow earnings faster than the companies that have traditionally driven much of the market’s performance.
Nvidia and Apple have yet to report, so the final numbers could change. Nevertheless, this is worth watching because earnings growth has been one of the main reasons investors have been willing to pay premium valuations for these companies.
Looking at the seven companies individually, their growth stories are becoming increasingly different.
1. Nvidia (NVDA) – The AI Infrastructure Leader
Nvidia remains at the centre of the AI investment cycle. Its GPUs are essential to training and running advanced AI models, while its networking products and software ecosystem strengthen its competitive position.
The key question is whether demand for AI computing continues to grow fast enough to justify the enormous expectations already reflected in its share price.
Investors will be watching revenue growth, gross margins, data-centre demand and forward guidance. Strong earnings alone may not be enough if expectations are already extremely high.
2. Microsoft (MSFT) – Turning AI Investment into Cloud Revenue
Microsoft has several ways to monetise AI through Azure, Microsoft 365 Copilot and its broader enterprise software ecosystem.
Azure growth is particularly important because it provides evidence that businesses are paying for additional cloud and AI capacity.
The challenge is balancing infrastructure investment with profitability. Investors need to see that AI is generating incremental revenue rather than simply increasing capital expenditure.
3. Alphabet (GOOGL) – Cloud Growth Versus AI Spending
Alphabet has a powerful advertising business, Google Search, YouTube and Google Cloud.
Its AI opportunity is significant, but the company also faces questions about how AI-powered search could affect its traditional advertising model.
Google Cloud growth and operating profitability will be important indicators. Investors will also be watching whether increasing AI infrastructure spending translates into stronger long-term cash generation.
4. Amazon (AMZN) – AWS and the AI Infrastructure Opportunity
Amazon’s investment case extends beyond online retail. AWS remains a major growth and profitability driver, while AI demand creates opportunities for additional cloud computing services.
The important indicators are AWS revenue growth, operating margins, retail efficiency and capital expenditure.
Amazon has the potential to benefit from both the companies building AI models and the businesses adopting AI services.
5. Meta Platforms (META) – Can AI Strengthen Advertising Returns?
Meta’s AI investment has a different route to monetisation.
Rather than relying primarily on selling computing capacity, Meta uses AI to improve advertising recommendations, targeting and engagement across Facebook, Instagram and WhatsApp.
If these investments improve advertising effectiveness, they could support higher revenue without requiring customers to purchase a separate AI product.
However, investors need to assess whether the benefits justify its rapidly expanding infrastructure spending.
6. Apple (AAPL) – A Different AI Strategy
Apple’s AI opportunity is more closely connected to its existing hardware ecosystem.
Its ability to integrate AI features into iPhones, Macs and other devices could encourage upgrades and strengthen customer loyalty.
However, Apple faces a different challenge from Nvidia and Microsoft. Investors need to see whether AI features can stimulate a meaningful upgrade cycle and create additional revenue opportunities.
Its services business, hardware margins and iPhone demand remain important parts of the earnings story.
7. Tesla (TSLA) – Beyond Electric Vehicles
Tesla’s investment case is increasingly tied to its ambitions in autonomous driving, robotaxis, robotics and AI.
However, its automotive business still matters considerably. Vehicle deliveries, pricing pressure and operating margins remain important measures of its underlying performance.
The long-term opportunity in autonomous driving and robotics could be substantial, but investors must distinguish between current financial results and future expectations.
The Bigger Question: Is Market Leadership Changing?
The most interesting part of the FactSet data is not simply that Magnificent 7 earnings growth has slowed. It is that the other 493 S&P 500 companies are now expected to grow earnings faster.
This could signal a broadening of the earnings recovery.
If industrials, financials, healthcare and consumer companies continue improving their profitability, investors may have more opportunities outside mega-cap technology.
It could also reduce the market’s dependence on seven companies to sustain the broader index.
However, faster earnings growth does not automatically make these other companies better investments. Valuation, debt levels, profit margins, cash flow and the sustainability of earnings still matter.
My investment perspective
I wouldn’t write off the Magnificent 7. Their competitive advantages, global reach and ability to invest at a scale few companies can match remain significant.
But I would be less comfortable treating all seven as one investment theme. Nvidia’s semiconductor business, Microsoft’s cloud platform, Alphabet’s advertising and cloud businesses, and Tesla’s autonomous driving ambitions have very different earnings drivers and risk profiles.
The next stage of the AI investment cycle may reward companies that can demonstrate actual financial returns rather than simply announce bigger investment budgets.
For me, the focus is shifting from who spends the most on AI to who can turn that spending into sustainable earnings and free cash flow.
For discussion purposes only.
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