MW 'Magnificent Seven' earnings expected to beat rest of S&P 500 - but that might not calm high-valuation fears

By Christine Idzelis

'We can think of no historical precedent for a handful of already sizable companies continuing to grow much faster than the rest of the S&P 500,' says DataTrek

The S&P 500 closed Monday just 0.3% below its all-time high, with Big Tech stocks soaring over the past year.

The group of Big Tech stocks known as the "Magnificent Seven" is expected to produce much stronger earnings growth than the rest of the S&P 500 over the next 12 months - but that gap may start shrinking in early 2026..

"We can think of no historical precedent for a handful of already sizable companies continuing to grow much faster than the rest of the S&P 500," said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Monday. "That leaves the market to its own devices when setting valuations, with the fulcrum issue being investor confidence in both macro conditions and individual company fundamentals."

The Roundhill Magnificent Seven ETF MAGS - an exchange-traded fund that holds seven Big Tech stocks including Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$, Google parent Alphabet Inc. $(GOOGL)$ $(GOOG)$, Amazon.com Inc. (AMZN), Nvidia Corp. (NVDA), Tesla Inc. $(TSLA)$ and Facebook parent Meta Platforms Inc. (META) - has surged almost 37% over the past 12 months to trounce the S&P 500's SPX gain of around 15% over the same period, according to FactSet data.

The S&P 500 has outsize exposure to the Magnificent Seven, making some investors anxious about concentration risk as the U.S. equities benchmark trades near its record peak. Big Tech valuations run higher than the S&P 500, with a handful of megacap companies spending massively on artificial intelligence amid tremendous enthusiasm for the technology.

Big Tech concentration has some investors "a little nervous," David Kelly, chief global strategist for J.P. Morgan Asset Management, said Monday during a media briefing on the firm's 2026 long-term capital-market assumptions. "People have to be very careful."

The Magnificent Seven is now 34% of the S&P 500, the DataTrek note shows. Excluding Tesla, the closely watched group trades at an average 30 times forward 12-month earnings - a 34% premium to the S&P 500, Colas noted.

"The S&P 500 continues to trade on expectations for strong earnings growth over the next two years," he said, pegging the index's valuation at 22.4 times forward 12-month earnings. That's above its average price-to-earnings multiple of about 20 over the last five years, Colas found.

'Start to close the gap'

"The Magnificent Seven are expected to grow earnings 1.6x faster than the S&P 500 over the next two quarters," Colas wrote. Looking further out, "Big Tech is expected to show much better earnings growth than the S&P 493 over the next four quarters, but the latter should start to close the gap" in the first quarter of 2026, he added, pointing to the FactSet chart below.

FACTSET

"Higher valuations than historical norms are the cornerstone of any bullish call on the S&P 500, with strong earnings growth for the next two years already discounted in stock prices," wrote Colas. "This requires a stable macroeconomic environment and calm market conditions, two hallmarks of a bull market."

AI is going to become "more powerful" over time, benefiting the economy and the markets, according to J.P. Morgan's Kelly.

He expects that AI will increase productivity, helping corporate profits while acting as a downward force on inflation over the long term. In its 2026 Long-Term Capital Market Assumptions study, J.P. Morgan Asset Management expects that U.S. inflation will average 2.5% annually over the next 10 to 15 years - with the firm cautioning Monday that "economic nationalism" means inflation will be more volatile and diversification in investment portfolios will be essential.

Benefits from AI should eventually spread beyond Big Tech into other areas of the stock market like financials, David Lebovitz, multiasset-solutions global strategist at J.P. Morgan Asset Management, told MarketWatch on the sidelines of the firm's media briefing Monday.

Check out: Just one 'Magnificent Seven' company expected as top 5 contributor to S&P 500 earnings growth in third quarter

Meanwhile, S&P 500 companies have begun rolling out their third-quarter results, with big banks kicking off earnings seasons last week.

"It's still early, but headline stats are coming in strong," said Savita Subramanian, equity and quantitative strategist at BofA Global Research, in a note Monday. Seventy-six percent of S&P 500 companies have beat on earnings per share, which is well above "the post-week 1 average of 68%," she wrote, adding that "big banks posted beats across the board."

Among Big Tech, Tesla will report its third-quarter earnings on Wednesday after the U.S. stock market closes.

Although most companies are beating estimates at this early stage of earnings season, so far it's not "the same sort of impressive earnings beats" seen during both the first and second quarters, Colas said.

The U.S. stock market closed sharply higher Monday, with the S&P 500 and Dow Jones Industrial Average DJIA each rising 1.1%, while the technology-heavy Nasdaq Composite COMP gained 1.4%. So far this month, the S&P 500 is up 0.7% after stumbling earlier in October.

"With the S&P 500 trading at 22.4x forward 12-month earnings, Q3 earnings season likely needs to show better results from here in order for the S&P 500 to regain some of its recently lost momentum," Colas wrote.

The S&P 500 ended Monday just 0.3% below its record close from Oct. 8, according to Dow Jones Market Data.

-Christine Idzelis

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October 21, 2025 07:00 ET (11:00 GMT)

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