Inside Markets — Broadening Out
Broadening Out
January 23, 2025
The market is now in waiting mode ahead of mega-cap Tech earnings that hit next week with META/MSFT due Wednesday, AAPL on Thursday and AMZN on Friday. The Magnificent 7 index (UBXXNAG7) has traded sideways since mid-December and neither the Nasdaq 100 (NDX) nor NVDA has taken out their respective highs. In our opinion, the market and the ‘Tech tape’ is in the process of broadening out. Positioning in Mag 7 stocks is currently crowded because these companies have posted much stronger earnings growth over the past three years than the remaining 493 SPX stocks. But if consensus estimates are accurate, the gap in earnings growth is about to narrow. In 2023, Mag 7 earnings growth was +76% vs. +14% for the remaining 493 – a differential of 62 percentage points. Last year, the gap narrowed to 23 percentage points (41% vs. 18%) and if consensus estimates prove accurate, the gap will narrow to just 6 percentage points (+18% vs. +12%) in 2025 – its narrowest in six years. The level of crowding in these stocks will be hard to justify if actual earnings growth matches consensus estimates. However, stock prices rise and fall based on estimate revisions, which makes next week’s earnings prints and forward guidance critical to the outlook.
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