Inside Markets — Mag 7 Earnings Growth

Consensus estimates for Mag 7 earnings suggests +18% earnings growth in 2025, which is down from +33% earnings growth in 2024. Meanwhile, consensus earnings growth of the other 493 stocks in the SPX is expected to increase to +12%, up from +3% in 2024. Taken together, the earnings growth differential between Mag 7 and the other 493 is expected to narrow to just 6 percentage points next year from 30 percentage points in 2024. Stocks go up when earnings estimate revisions go up and stocks go down when estimates are revised lower. So the narrowing of the Mag 7 relative earnings differential could drive relative underperformance from the group at a time when concentration in the SPX is at an all-time high of 30%. A potential convergence in relative performance will likely lead to an unwinding of concentration in Mag 7 stocks and create frustration for the average investor that may hold more of their overall portfolio in these stocks (401k funds and ETFs) than they realize.

Mag 7 stocks still have a slight edge from an earnings growth perspective, but macro factors (lower rates) and potential policy changes (tariffs, deregulation, support for domestic growth) seem to favor smaller, but not small cap companies. The SPX and small cap Russell 2000 (RTY) both trade at ~22x forward earnings, while the S&P Midcap 400 index (MID) trades at just ~16x forward earnings.