Earnings Season Gets Real As The Magnificent 7 Begins Reporting

Within the S&P 500, 36 companies reported earnings last week, with a sizable number being financials. 80% of S&P 500 firms reported better-than-expected earnings for the quarter. This week marks the second busiest of the fourth-quarter earnings season, with 104 S&P 500 companies scheduled to report. And most crucially, four of the Magnificent 7 report earnings this week. The Magnificent 7 consists of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA).

Supportive earnings and stable bond yields sent stocks higher. The S&P 500 rose 1.8% for the week, and the Magnificent 7 gained 1.5%.

The financial sector again contributed most significantly to last week's earnings growth improvement. According to FactSet data, Travelers (TRV) and Discover Financial Services (DFS) were the most significant contributors to the increase in earnings for the financial sector, which rose to 49.4% from 47.5%.

The financial sector is expected to show the most rapid year-over-year growth rate in the S&P 500, followed by technology and communications services. The energy sector is at the bottom, with a forecasted almost thirty-one percent decline in year-over-year earnings.

Sales growth is closely tied to nominal GDP growth, which combines after-inflation economic growth (real GDP) with inflation. At this point in the earnings season, sales growth at 4.6% has met expectations, with the tailwind from an estimated 5% year-over-year nominal GDP growth.

Sales growth is expected to be the most robust in the technology sector, with the energy sector predicted to show the most significant decline in year-over-year revenue due to lower oil prices.

Due primarily to the robust earnings growth for banks and other financial companies, the blended earnings performance has outperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter is at +12.7% year-over-year, above the expectation of +11.9% at the end of the quarter.

Because these companies are a critical driver of earnings growth and a significant percentage of the S&P 500’s market capitalization, the Magnificent 7 are again the group to watch this earnings season and this week. According to FactSet, the Magnificent 7’s earnings are expected to grow by 21.7% year-over-year versus 9.7% for the rest of the S&P 500. Microsoft (MSFT), Meta Platforms (META), and Tesla (TSLA) are scheduled to report on Wednesday after the close, with Apple (AAPL) on Thursday night. The forward earnings guidance and any implications for artificial intelligence spending will be watched closely.

This week, there are releases across the sectors, which will provide a better sense of the overall earnings environment. Beyond the Magnificent 7, other companies reporting are Starbucks (SBUX), Mastercard (MA), Visa (V), Chevron (CVX), and Exxon Mobil (XOM).

In addition to earnings, there are many economic releases and a Federal Reserve (Fed) meeting. Notably, fourth-quarter U.S. GDP, a measure of economic growth, will be released on Thursday. The economy is likely to continue to show above-average growth and entered 2025 with good momentum. Consensus estimates for fourth-quarter GDP growth are 2.7%, with the Atlanta Fed projecting almost 3% growth.

The Fed meets on Wednesday before the GDP release but is armed with enough data to make the result of the gathering a foregone conclusion. The combination of resilient economic growth and above-target inflation should result in no change to short-term interest rates. While the conclusion is almost certain, Chair Powell’s comments will be watched closely for clues as to the timing of future rate cuts. Currently, expectations are for a total of two 25 basis point (0.25%) reductions in 2025, with the first cut not likely until near mid-year.

Financial companies provided an excellent start to earnings season, but this week will be crucial with more broad representation and the majority of the Magnificent 7 on the calendar. Because the Magnificent 7 companies are responsible for significant earnings growth, their forward guidance should significantly impact overall expectations. The Fed is almost sure to make no changes to short-term interest rates, but Chair Powell’s statement will impact expectations around the pace and timing of future cuts and, thus, markets.