The second quarter is shaping up to be a turning point for the “Other 493” companies outside of the tech giants, with expected earnings growth after a period of stagnation or decline. This shift could lead to broader market gains as the tech sector’s growth slows, according to Bank of America.
Bank of America analysts Ohsung Kwon, CFA, and Savita Subramanian have a more conservative outlook on Q2 earnings for U.S. companies compared to consensus estimates. While the consensus predicts a 9% year-over-year increase in earnings per share (EPS) for Q2, the analysts anticipate a 2% beat, which is in line with historical averages but the smallest since Q4 2022. The weak macroeconomic data from last quarter is cited as a factor behind the weaker-than-expected forecasts.
The Invesco S&P 500 Equal Weight ETF has underperformed the cap-weighted SPDR S&P 500 ETF Trust by approximately 13 percentage points year-to-date. This performance gap widens even further when comparing the broader market with the tech giants, known as the Magnificent 7. However, as the tech sector’s rapid growth begins to slow down, the “Other 493” companies are poised for earnings growth, potentially closing the performance gap.
Bank of America notes that the Magnificent 7 companies entered an earnings recession earlier, prompting cost-cutting measures that led to an earlier earnings recovery. This trend is expected to continue in the upcoming quarters, with tech layoffs decreasing while layoffs outside the tech sector increase, presenting more cost-cutting opportunities in non-tech industries.
A virtuous cycle from AI investments is also on the horizon, with major tech companies like Microsoft, Amazon, Alphabet, and Meta Platforms investing heavily in AI for the coming years. This investment is expected to boost demand for semiconductors, electrification, construction, utilities, and commodities, potentially creating more jobs.
In DailyBubble’s perspective, these developments in the earnings landscape and AI investments present opportunities for investors to diversify their portfolios and capitalize on the shifting market dynamics.