The S&P 500 nearly matched its July 28 record high on Friday. The Nasdaq did rise to a record high. Once again, the Magnificent-7 stocks collectively are leading the pack. That's because these remarkable companies continue to deliver magnificent earnings, which are increasingly being driven higher by the demand for cloud computing as AI increasingly powers the Digital Revolution.
The S&P 500 nearly matched its July 28 record high on Friday. The Nasdaq did rise to a record high. Once again, the Magnificent-7 stocks collectively are leading the pack. That's because these remarkable companies continue to deliver magnificent earnings, which are increasingly being driven higher by the demand for cloud computing as AI increasingly powers the Digital Revolution.
The sky seems to be the limit for the cloud providers. More and more of us are using AI's large language models, like GROK, ChatGPT, Claude, and Copilot, as tools to do research, to write software, to create content, and to work more productively. These AI tools are all processing and storing our interactions with them in the cloud and learning from these interactions to become more useful to us. As the tools become more useful, the cloud companies earn more, and they must spend more to expand their data center capacity. Our collective ability to process more data leads us all to create more data to process. And so on. So the sky really is the limit!
Better-than-expected earnings reported by the Magnificent-7 contributed to the better-than-expected earnings results of the S&P 500 companies in aggregate during Q1 and Q2 (chart). Q1's earnings rose almost twice as fast as was expected just before the earnings reporting season. Q2's growth rate may be on track to be three times greater than expected.
S&P 500 earnings estimates for 2025 and 2026 jumped significantly last week on strong results from Amazon, Apple, Meta, and Microsoft (chart). S&P 500 forward earnings per share rose to yet another record high, of $288.85, last week. By definition, this series will converge with the 2026 earnings expectations series by the end of this year. The latter rose to $302.61 last week. We expect the two of them to converge at $300 per share by year-end. Our outlook for earnings doesn't seem to be as wildly optimistic as it was at the start of this year!
The percentage of S&P 500 companies with positive three-month percent changes in their forward earnings jumped to 84.1% last week (chart). This measure of earnings breadth augurs well for the bull market and suggests that it could broaden in the coming months.
The sky may be the limit for the Magnificent-7 and the bull market they are leading. However, as Icarus learned the hard way, flying too close to the sun invites a meltdown. The forward P/Es of the S&P 500 with and without the Mag-7 are at 22.5 and 19.9, with the Mag-7's valuation multiple at 29.7 (chart). Stocks are not cheap. But as long as the odds of a recession remain low, these high valuation multiples are sustainable.
The Mag-7 stocks continue to justify their elevated valuation multiples by regularly beating analysts' consensus earnings expectations. The only wild card seems to be Tesla. Collectively, they now account for 32% of the market cap of the S&P 500, 23% of its aggregate forward earnings, and 12% of its aggregate forward revenues (chart).
Since the April 8, 2025 correction low of the S&P 500, the Mag-7 stocks are up 48%, outpacing all the other major stock market indexes. Their outlook remains sunny as long as they don't fly too close to the sun.
