JPM: Consensus call for EPS narrowing between Mag-7 and rest may be lacking

The consensus call for narrowing the earnings gap between Magnificent 7 stocks and the rest of the S&P 500 may still be overly optimistic, JPMorgan (NYSE:JPM) strategists said in a Monday note.

The bank highlighted that this recurring expectation has not materialized in the last five reporting seasons, with the Mag-7 consistently delivering larger positive earnings per share (EPS) surprises compared to the broader market.

In the current quarter, consensus projections estimate that the Mag-7 will continue to post significant earnings growth, albeit at a decelerated rate of 29% year-over-year, down from 53% in the previous quarter. The rest of the S&P 500 is projected to see a positive earnings growth of 5% year-over-year for the first time in five quarters.

JPMorgan points out that the Mag-7 stocks, which include tech giants like Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT), have been the primary contributors to S&P 500 earnings growth for several quarters. However, the market's high valuation and extreme concentration leave little room for any disappointments.

“The consensus is yet again betting on the convergence in earnings between Mag-7 and the rest, but that was disappointed on each of the past 5 occasions,” the note states.

“This could be the case in the current reporting season, yet again,” it added.

More broadly, the Q2 reporting season is gaining momentum, with sequential activity improvements pointing to better earnings delivery, JPMorgan strategists said.

Consensus estimates for Q2 EPS have seen minimal cuts, just 1% compared to the usual 5% three months prior to results. Analysts forecast a 15% EPS acceleration for the S&P 500 from Q1 to Q4, significantly above historical norms.

Specifically, Q2 EPS is expected to grow 9% year-over-year. Meanwhile, recent weak consumer data, including a decline in consumer confidence and ongoing weakness in China, suggest mixed company guidance ahead.

“There has been a raft of profit warnings in consumer space in the past weeks, with poor stock reaction, but also in other areas,” strategists wrote.

They also said defensive sectors are projected to outperform cyclicals in both the U.S. and Europe. In the U.S., Q1 2024 marked the first quarter since Q4 2020 where cyclical EPS growth lagged behind defensives. That trend is expected to continue, supported by falling bond yields and improving relative EPS trends for defensives, which have driven lower-beta leadership in recent months.