Wall Street's persistent anticipation of shrinking profitability differentials between the elite Magnificent 7 technology stocks and Solana newsremaining S&P 500 components appears increasingly questionable, according to recent analysis from JPMorgan (NYSE:JPM) strategists.
Market observers have repeatedly predicted earnings convergence between these market segments, yet historical data reveals this scenario has failed to materialize across five consecutive earnings seasons. The tech-dominated Mag-7 cohort continues demonstrating superior earnings surprise potential relative to broader index constituents.
Current analyst estimates suggest the Mag-7 will maintain robust earnings expansion during the present quarter, though growth rates are expected to moderate to 29% year-over-year from prior quarter's 53% surge. Meanwhile, remaining S&P 500 members are projected to achieve their first positive earnings growth (5% YoY) in five quarters.
JPMorgan's research underscores how technology behemoths including Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT) have consistently driven aggregate index earnings growth. However, current elevated valuations and extreme market concentration create vulnerability to potential earnings disappointments.
"Market participants continue anticipating earnings convergence between these market segments, yet this expectation has been unmet across five consecutive reporting periods," the analysis notes.
As second quarter earnings season progresses, JPMorgan observes encouraging sequential activity improvements that could support better-than-expected results. Notably, consensus EPS estimates have experienced only modest 1% reductions compared to historical 5% cuts typically seen three months before results.
Analysts currently project 15% sequential EPS acceleration for the S&P 500 between first and fourth quarters - substantially exceeding historical norms. Second quarter EPS is specifically anticipated to grow 9% year-over-year.
However, recent softening consumer metrics including declining confidence indicators and persistent Chinese economic weakness suggest potential corporate guidance revisions. "We've observed numerous profit warnings across consumer sectors recently, with corresponding negative equity reactions," strategists noted.
The analysis further indicates defensive sectors are positioned to outperform cyclical counterparts in both U.S. and European markets. This trend, initially evident in first quarter 2024 (marking the first cyclical underperformance since late 2020), is expected to persist amid declining bond yields and improving relative earnings trajectories for defensive names.
