- Four of the so-called Magnificent Seven will release their latest quarterly results this week
- Investors will look to earnings and cash flow statements for reassurance
- A shake-down in silicon chip stocks and SpaceX’s share price reflect questions over how further investment in AI is to be funded and what returns it will generate
- Mag7’s most recent statements have been strong but relied on non-operational items for upside surprises
“One of the main planks for the investment case for US equities is powerful earnings momentum, where technology companies are leading the charge, so the latest batch of quarterly results from Meta Platforms, Microsoft on Wednesday and Apple and Amazon on Thursday this week will be a key test,” says AJ Bell investment director Russ Mould.
“Alphabet has already pleased, while Tesla disappointed, and investors have to wait for 26 August for NVIDIA’s second-quarter figures, but the focus will be not just on the quantity of profits, but the quality, as reflected in the role played by financial income, trends in costs and capital expenditure and whether previously impregnable balance sheets are weakening.
“The outlook does look bright in the USA, after the first-quarter reporting season delivered plenty of positive surprises and upgrades galore for the second quarter at the same time.
“Thanks to technology stocks in particular, but with energy and industrials chipping in handsomely, analysts believe that the S&P 500 index’s members will generate record earnings in 2026 and 2027.
“Analysts also continue to upgrade their forecasts. At the start of this year, consensus estimates were looking for 17% growth in S&P 500 aggregate earnings per share (EPS) to $310 a share.
“Now analysts expect a thumping 30% rate of increase in EPS across the index to $343, with a further 17% advance in 2027 to $400.
Source: Company accounts, Marketscreener, consensus analysts' forecasts
“This all suggests that US equities continue to enjoy a helpful tailwind, but the peak of the dotcom bubble in the late twentieth century was also characterised by forecasts of record profits, earnings upgrades and estimates of above-trend growth, right up until the smash in early 2000. As such, investors cannot be complacent.
“The role played by financial income must be studied carefully. Alphabet’s second-quarter numbers absolutely demolished consensus forecasts, as EPS came in at $9.11 against the analysts’ expectation of $2.88, but the vast bulk of the upside came from a $98 billion unrealised capital gain on its investments and equity holdings, which include SpaceX.
“Tesla’s second-quarter numbers, and the first-quarter profits of Alphabet, Amazon and NVIDIA were similarly flattered. This is fine when financial markets are buoyant, but it will be far less helpful in the event of a correction or a flat-out bust.
Source: Company accounts for Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. *Only Alphabet and Tesla have reported Q2 results as of 28 July.
“The danger is these financial gains lull investors into a false sense of security. It would be unwise to assume that such bounty can be regularly harvested, and such gains form a wobbly base for any investment case based upon earnings momentum.
“This becomes even more pertinent when investors consider that the EPS growth rates predicted by analysts for the next two years are miles above the twenty-year compound annual growth (CAGR) rate of 6.4%.
“The bull case will assert that productivity gains thanks to Artificial Intelligence more than justify the assumption of an era of premium growth and only time will tell if that is the case.
“But the forty-year CAGR for S&P 500 earnings per share is still just 6.7%.
“That longer period encompasses not just the technology, media, and telecoms profits boom of 1998 to 2000 but also the long-term economic benefits of the broadband, wireless telecoms, and internet build-out that have exceeded even the wildest dreams of investors and analysts back at the turn of the century.
“It may well be different this time, but the absence of any acceleration in American companies’ long-term earnings growth seems to back up the assertion of the American Nobel Laureate economist Robert Solow that, “You can see the computer age everywhere but in the productivity statistics.”
“The risk, therefore, is that investors are paying lofty valuations for record earnings. This may be all well and good if the earnings materialise, but there could be trouble ahead if they do not.
“Even the bumper profits expected for 2026 and 2027 leave the S&P 500 index, at 7,429, on forward earnings multiples of 21.7 times and 18.5 times, respectively. The 10-year average is around 18 times, according to FactSet, although bulls will argue that a price-to-earnings growth (or PEG) ratio of barely 0.7 times for 2026 and 1.1 times does not leave them as hostages to fortune.
“However, should the so-called Solow Paradox hold true then the combination of lofty valuations and earnings disappointment could be a recipe for greater volatility in US equities, at the very least, which makes the latest round of results reports, and outlook statements for the next quarter, so important.”
