The fading ex-Mag7 earnings outlook

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“Broadening out” is the hot new US stock market narrative, with the equal-weighted S&P 500 index actually beating its top-heavy conventional counterpart over the past month.

Even smaller stocks are finally catching up a little, with the Russell Midcap index (+4.3 per cent) and the Russell 2000 (+3.6 per cent) leading the Russell 1000 (+3.2 per cent) in March, notes Bank of America.

However, this slide in the latest deck sent out by Goldman’s David Kostin caught FT Alphaville’s eye:

Last autumn saw a US earnings recession — typically defined as two quarters of contracting corporate profits — snapped mostly thanks to bumper big tech earnings. This chart doesn’t per se indicate that it’s going to restart, as it merely shows that earnings forecasts are getting trimmed, not necessarily that they are expected to fall again.

Goldman, for example, expects 8 per cent EPS growth for the S&P 500 in 2024, and 6 per cent in 2025. And bottom-up EPS forecasts often get gradually trimmed as early-year optimism fades. So far, 2024 is actually tracking better than usual.

However, it does underscore just how much the rampant optimism surrounding some of the Magnificent Seven (especially Nvidia) continues to obscure rising pessimism about the earnings outlook for the S&P 493.

Just take a look at the next two years of expected revenue growth for the Mag7 versus the S&P 500 hoi polloi.