By Teresa Rivas

When it comes to stocks, bigger is still better.

With second-quarter earnings season mostly wrapped up, it is fair to say that reports were generally better than expected for S&P 500 companies. Forecast aggregate 2025 earnings for the index have shot up.

Yet that optimism hasn't meant significantly higher forecasts for 2026 and 2027, according to Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. The problem is that the market is highly dependent on megacap tech companies.

While forecasts for growth in earnings per share for the Magnificent Seven -- Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla -- haven't risen in a straight line since the beginning of the year. those companies' profits are still expected to grow faster than for the S&P 500. The outperformance is expected to be modest next year, and wider in 2027.

"We think the persistence of this earnings growth advantage has helped power the outperformance of the biggest market cap names in August, especially since the 2026-2027 EPS growth forecast generally hasn't seen a major upgrade yet," Calvasina wrote.

Tech doesn't just shine when it comes to EPS. She noted that while forecasts of revenue and profit for the second and third quarter have risen for most sectors in the S&P 500, forecasts for margins for the index overall have fallen. Expectations for margins in "old economy" sectors such as energy, materials, and industrials, along with healthcare, have suffered as analysts try to handicap the damage from tariffs.

Tech "is the only sector that has seen operating margin forecasts move up recently for both time periods," she wrote. Expectations for second-quarter margins in communications services, which includes Alphabet and Meta, have come under pressure, but the outlook improves for the three months through September.

"The greater margin resiliency of 'growth sectors' relative to value or old economy sectors also helps to explain their outperformance of late," Calvasina wrote. That robust profitability makes the tech sector look "reasonably valued on a median forward price-to-earnings basis relative to the broader market," she said.

Still, there is hope for the S&P 500 as well. DataTrek Research co-founder Jessica Rabe took a look at average analyst price targets for the Magnificent Seven and Broadcom on Tuesday, finding that the implied moves ranged from a decline of 8.6% for Tesla to a gain of almost 19% for Microsoft.

Excluding Tesla, the group has an average implied gain of 7%, which trails behind the 11% rise that analysts' price targets point to for the S&P 500. The problem, she said, is that price targets for four big tech names -- Apple, Broadcom, Nvidiam and Tesla -- are below or just at where the stocks closed on Monday.

Price targets haven't kept pace as tech has raced to new highs in recent weeks. Microsoft, Amazon, and Meta are the only three of the group with bigger implied gains than the S&P 500. And price targets for the 10 biggest non-tech companies in the S&P 500 -- Berkshire Hathaway, JPMorgan Chase, Visa, Eli Lilly, Netflix, Mastercard, Exxon Mobil, Walmart, Costco, and Johnson & Johnson -- imply about 11% upside, easily outstripping the average big tech name.

Of course analyst price targets are just one data point, and one to be taken "with a grain of salt," as Rabe noted. Still, if analysts are roughly on the right track, their forecasts for prices show that perhaps the rally will continue to broaden out beyond the narrow band of the usual big tech suspects.

On the other hand, big tech accounts for about 35% of the S&P 500, versus 10% for those other megacap stocks, so tech still needs to show up for the index to push higher. Fortunately, Rabe is still upbeat about both the biggest companies as a whole, and the big tech companies that have benefited the most from enthusiasm over generative artificial intelligence. She calls them the Fab Four: Broadcom, Meta, Microsoft, and Nvidia.

"Our saying to "never short new highs" still applies, with those 4 recently having done so," Rabe concluded. "Not only do those names have momentum and outsized exposure in the index, but analysts are pretty bullish for the S&P's next 10 names. We are still positive on US large caps and Tech through year-end."

Maybe the bigger they are, the harder they climb.

Write to Teresa Rivas at teresa.rivas@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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August 19, 2025 13:19 ET (17:19 GMT)

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