In just the last week, the blended earnings growth rate of S&P 500 earnings has leapt from 15% to 27%. All the increase has come from positive EPS surprises from three companies: Alphabet (GOOG), Amazon (AMZN) and Meta Platforms (META).
According to FactSet, these three ‘Mag 7’ companies alone accounted for a whopping 71% of the increase in Q1 earnings. All three posted above-average earnings surprises, led by Alphabet’s 90% ‘beat’ with EPS of $5.11 against the consensus of $2.68. On average, Alphabet has beaten quarterly earnings forecasts by around 12% over the last five years.
Close behind Alphabet is Amazon, which posted a 70% positive surprise with EPS of $2.78 against the $1.63 consensus. Over the last five years, Amazon’s average quarterly positive surprise has been around 29%.
In third place, Meta posted a 56% Q1 positive surprise with EPS of $10.44 against the $6.67 consensus. Meta’s record of ‘beats’ has averaged just 4.3% over the last five years.
‘Mag 7’ still dominant
Due to these substantial ‘beats’, the Q1 blended EPS growth rate for Communication Services (which includes Alphabet and Meta) is now 53%. That compares with a blended growth rate for the sector of -3.8% as of 31 March.
The blended earnings growth rate for the Consumer Discretionary sector (which includes Amazon) has also jumped. Instead of 1.7% as of 31 May, the growth rate is now 39% for the quarter.
The blended growth rate for the whole of the ‘Mag 7’ has jumped to 61% from expectations of 22% as of 31 March. Including Nvidia (NVDA), four of the top five contributors to Q1 EPS growth are ‘Mag 7’ companies (the fifth is Micron (MU)).
If the final growth rate for the quarter is 27% rather than 15%, it would mark the highest quarterly increase since Q4 2021. Even if the overall growth rate slows to 20%, it will still be the best growth rate in nearly five years.
With these kinds of numbers, it’s hardly a surprise the US market is hitting new highs. There may be a conflict raging in the Middle East, but obviously no-one told the ‘Mag 7’.
We have to point out, however, thanks to FactSet’s research, that most of these EPS beats came from one-off gains. All three companies report earnings on a US GAAP (generally accepted accounting principles) basis which splits out non-recurring items.
Alphabet’s Q1 earnings included $37.7 billion of one-off gains, mainly net unrealized valuation increases in non-marketable securities. Amazon’s Q1 included a one-time $16.8 billion pre-tax gain from its investment in Anthropic, while Meta’s earnings included an $8 billion tax benefit.
Without these non-recurring items, the ‘beats’ would have been nowhere near as spectacular, nor would their impact. Yet investors seem to prefer to take the numbers at face value. After all, why let facts get in the way of a good story?
