The Magnificent Seven are projected to grow third-quarter earnings more slowly than the rest of the S&P 500 for the first time this year. Analysts expect the broader index to pick up the slack just as the reporting season gets underway, even as market breadth beneath the index's record highs stays thin.
Analysts now expect the Magnificent Seven to post third-quarter earnings growth of 20.3% from a year earlier. The rest of the S&P 500, meanwhile, is projected to grow profits by 27.7%, according to Russell Investments. That marks a reversal from the second quarter, when Mag-7 earnings doubled while the rest of the index grew profits 30%, per FactSet.
Breadth stays thin beneath record highs
The S&P 500 reached an all-time high on Tuesday, lifted by Nvidia. The chipmaker also rose to record levels and carries roughly an 8% weighting in the index.
Yet the equal-weighted version of the S&P 500 is roughly 6% off its record. And 75% of S&P 500 constituents closed September in negative territory, CNBC reported.
In periods this year, investors have rotated toward semiconductor companies such as AMD, Micron and Intel. But a surge in oil prices and bond yields in recent months pulled investors back toward their old favorites, according to CNBC.
Financials and small caps could catch a bid
Art Hogan, chief market strategist at B. Riley Wealth, expects the reporting period to reward sectors hit hardest in recent months, such as small caps and healthcare. He favors financials, a group that was down 7% in September.
BeiChen Lin, head of Canadian strategy at Russell Investments, expects the S&P 500 to end the year 5% higher than its current level. According to Russell Investments: "volatility is a normal part of the market cycle", Lin said, adding that it can sometimes create dislocations that let investors buy in at a better price.
The third-quarter earnings season begins Thursday with Delta Air Lines and PepsiCo reporting. A record number of S&P 500 companies are issuing positive guidance, per FactSet.
Sources: CNBC, Investinglive
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