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“The Magnificent Seven” showed significantly better revenue growth in the first quarter compared to other market segments.
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Amazon and Alphabet were the major players driving this outperformance.
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Investors should think about the valuation as the rest of the market begins to catch up with these standout companies.
S&P 500 has seen remarkable returns over the last two and a half years since the low point of the 2022 bear market. It’s up nearly 70% since October 2022, but a majority of the gains come from just a few stocks. For most of this period,> “The Magnificent Seven” has outperformed the benchmark for some obvious reasons.
Collectively, these notable stocks have delivered much better revenue growth than the broader S&P 500, consistently exceeding revenue expectations. However, there are signs analysts believe this trend may come to an end soon.
Here’s what investors need to keep in mind:
NVIDIA reported on May 28 and noted that its revenue had surged 27.7%, surpassing analyst expectations of 16% growth. Let’s break down the specifics:
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Amazon: Earnings per share (EPS) stood at $1.59 compared to an expected $1.36, marking a 62% increase year-on-year.
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Alphabet: Reported $2.81 EPS against an anticipated $2.01, a projected increase of 49% from the previous year.
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Meta Platforms: Delivered $6.43 EPS versus an expected $5.22, indicating a 37% year-over-year rise.
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NVIDIA: Achieved $0.81 EPS against expectations of $0.75, a 33% year-on-year increase.
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Microsoft: Reported $3.46 EPS, exceeding the expected $3.22, up 18% year-on-year.
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Apple: Recorded $1.65 EPS versus an anticipated $1.62, an 8% rise from the prior year.
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Tesla: Reported $0.27 EPS compared to the expected $0.41, reflecting a 40% decline year-on-year.
Six out of the seven companies are performing exceptionally well, with five growing quicker than the other 493 firms in the S&P 500, which averaged 9.4% growth. Still, there are substantial differences in performance among the companies.
Tesla is struggling at the moment, facing political backlash against CEO Elon Musk and rising competition from Chinese manufacturers like BYD. This led to a 13% drop in deliveries year-over-year in the first quarter, alongside a decline in average selling prices. The company has acknowledged that increased AI spending will be necessary to bolster future self-driving projects.
On the flip side, Amazon and Alphabet are thriving, driven by their cloud computing units. Amazon Web Services saw a 17% sales increase year-over-year, with margins improving to 39.5%. Google Cloud’s sales rose by 28%, expanding its operating margin to 17.8% from 9.4% last year. Their high-margin Google Ads business continues to experience strong growth.
While NVIDIA felt the effects of GPU sales restrictions in China, it still managed impressive revenue growth. If it weren’t for inventory depreciation affecting sales designed for China, growth might have reached 57%.
Tesla stands out as the only underperformer right now, but the outperformance of the other companies won’t last indefinitely. Analysts expect the group to continue exceeding the rest of the market in revenue growth until the end of 2025, but there could be challenges from better-performing S&P 500 stocks in 2026.
This forecast carries notable implications for investors, even if it turns out to be off-target, which often happens in one-year projections.
First, investors should begin to differentiate more among these seven stocks moving forward. We’ve already seen a dip in Tesla’s stock, and despite Apple surpassing expectations, its stock prices have faced pressures under tariffs. As revenue growth slows, valuations become increasingly crucial. Right now, Alphabet is the only one among them that seems quite attractive.
Secondly, there may be more growth potential within the smaller stocks of the S&P 500. Analysts anticipate that some other companies outside the “epic seven” will continue showing growth, and it’s worth noting that these firms are often trading at fair valuations.
Another option could be to invest in an S&P 500 index fund, like the Invesco S&P 500 Equal Weight ETF, which spreads investments evenly across all 500 components and readjusts quarterly. This allows exposure to small businesses in addition to the large corporations in the index.
As the market evolves towards more equality, investors might find smaller company stocks performing better over the next year or longer. Many of the “epic seven” are starting to appear more costly relative to their projected future revenue growth, and it might make sense to sell some shares to explore new opportunities.
This is something to ponder before diving into Nvidia shares.
