Growth is No Longer Just for Tech Megacaps

The AI bubble hasn’t popped; it’s just saving room for the rest of us. 

Thanks to a favorable earnings season for many in Corporate America, S&P 500 stocks — excluding the Magnificent Seven — are on pace to deliver their first profit growth since the fourth quarter of 2022, Bloomberg reported. Say hello to the Magnificent 493. 

Mind the Gap

By this spring, the market had become highly concentrated: The top 10 largest companies on the S&P — most of which are Big Tech stocks riding the AI wave — accounted for one-third of the entire index. The S&P hadn’t been that top-heavy since the 1970s. 

And that’s still the case, but as far as profits go, the gap between megacaps and the rest of the S&P is narrowing:

• Profits for the Mag-7 — Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, and Nvidia — are set to rise 35% in the second quarter year-over-year, according to Bloomberg Intelligence. It’s healthy growth, but a slowdown from last year, making way for some much-needed diversity in all our portfolios.

• After five straight quarters of decline, S&P securities outside of the Mag-7 are set to grow 7.4% in the second quarter year-over-year. Home Depot, Walmart, and Target — which will report earnings this month — are expected to be major contributors to the growth, too. 

SMIDdling Returns: JPMorgan says megacaps and things like Nvidia, Apple, and Microsoft battling it out for the title of biggest company on the planet have distracted investors from the rest of the market, and all the high-quality SMID-cap stocks it has to offer, over 90% of which have minimal analyst coverage. In June, the bank said smaller-cap securities are now trading at a near-record valuation discount versus their large-cap peers, despite having similar cash flows and profit margins, creating a potential entry point into SMID-cap stocks for investors. Don’t forget about the (relatively) little people.