Opinion Unhedged
The Magnificent 7 growth slowdown
Plus oil prices and secondary tariffs
Aiden Reiter
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Aiden Reiter and Hakyung Kim
Published11 hours ago
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Good morning. Treasury secretary Scott Bessent called for an investigation into the Federal Reserve yesterday, adding to fears that the Trump administration could move to fire chair Jay Powell and throw the institution into chaos this year. Treasury yields across maturities jumped a couple basis points in the hour after his remarks, but calmed down quickly after, and slid the rest of the day. The 2-year Treasury fell 1 basis point, while the 10-year and the 30-year slipped 3 and 4 basis points, respectively.
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The Magnificent 7
It’s officially earnings season for the Magnificent 7. We will see earnings for Alphabet and Tesla tomorrow, Amazon on Thursday, and Meta, Apple and Microsoft next week. To say it will be a big deal to the market is an understatement. The market’s three-month recovery has been driven by Big Tech:
From a market cap perspective, the Mag 7 is now 31 per cent of the S&P 500, also near an all-time high:
As Jason Pride at Glenmede points out, earnings growth should be strong this quarter — but not exceptionally strong. Big Tech’s annual earnings growth results have been flat or slowing for the past few quarters, and are expected to slow further in 2025 and 2026. We exclude Nvidia from the graph below, since its earnings growth in 2023 and early 2024 is too off the chart, but it has a similar pattern; we also excluded Tesla, as its earnings are all over the place and a clear outlier:
For the market and these companies, this is potentially a bad sign: over the past two years, investors have often punished Mag 7 stocks for earnings results that were great, rather than astounding. A further growth slowdown does not bode well. Here, for example, is Microsoft’s performance last year; we’ve called out how much the quarterly EPS in each release overshot Wall Street’s estimate. The stock only perked up with an 8 per cent beat, and fell on the rest:
In such an expensive market, it is completely fair to expect a lot from the priciest stocks. And, as Dec Mullarkey at SLC Capital Management astutely points out, part of the earnings growth slowdown is from normalisation to an increasingly high annual base.
Even so, Bank of America predicts the Magnificent 7 is only expected to keep its earnings growth edge over the rest of the S&P 500 for another 18 months:
That deceleration is concerning, especially for this year. But 18 months is still a long runway. And, thankfully, this is a two-sided story: the market expects a slowdown in earnings growth for the Magnificent 7 and a pick-up in earnings growth for the S&P 493. The Magnificent 7 should continue to grow in the low teens and may accelerate again in 2027, while the rest of the market will hopefully catch up. “[There is] a constructive aspect to this market,” said Kevin Gordon at Charles Schwab. “The last time the Magnificent 7 decelerated, the rest decelerated too, setting up the bear market of 2022. As long as breadth continues, we could get the best of both worlds.”
A broader market, if we get it, will be an unvarnished good, so long as the big companies can continue to hold up the S&P 500 until then. Slowing earnings growth, and the high potential for bad guidance on tariffs and capex, will be a challenge.
(Reiter)
Secondary tariffs
Last week, Donald Trump, frustrated with Russian President Vladimir Putin’s unwillingness to end the war in Ukraine, threatened Russia with secondary tariffs. The exact details of the tariff are, as usual, unclear. But, as far as the market can tell, Trump is promising to hit any country that imports Russian energy with 100 per cent tariffs, if Russia and Ukraine fail to reach a ceasefire by early September.
The Brent crude price, surprisingly, fell on the news:
A note from Deutsche Bank attributed the fall to the “sizeable delay” of the 50-day deadline. But the fall may also reflect uncertainty over what secondary tariffs could do, how they will be structured, or if they will even happen.
Russia’s crude oil exports account for 5 per cent of global consumption, or about 4.5mn barrels per day, according to Kieran Tompkins at Capital Economics. Ever since the start of the war in Ukraine, its crude exports have been concentrated among just a few trading partners: 73 per cent goes to India and China by sea, another 24 per cent goes to China by pipeline, and the rest goes to various European countries and Turkey.
If tariffs make that oil unsellable, that would not necessarily shock the market. Crude exports from Russia are a bit less than the 5.5mn b/d in spare production capacity held by the rest of Opec+, said Tompkins. “In theory the oil market could absorb a full embargo on Russian exports?.?.?.?[but] removing that spare capacity would be akin to riding a bike with no shock absorbers — oil prices would feel every jolt from every exogenous shock.” With still smouldering conflict in the Middle East, this seems like bad timing. And there is not a consensus on that short-term impact. According to Hunter Kornfeind at Rapidian Energy Group, even if just half of Russia’s crude exports and refined exports (another 2.4mn b/d total) were disrupted, there would be a significant surge in crude prices for a few months.
But — like many of Trump’s threats — it seems unlikely that he will follow through. “Trump has shown very little willingness to do anything that pushes oil prices higher, and he’s trying to get a rate cut,” noted Helima Croft at RBC Capital Markets. He abandoned similar plans to tariff countries that import Venezuelan oil just a few months ago.
There is a less severe option available to the Trump administration, too. According to Croft, if the US really wants to target Russia’s oil exports and not disrupt the entire market, the Trump administration could build on existing sanctions on Russian oil companies — Rosneft, Lukoil and Gazprom, for example — by just sanctioning the Chinese, Indian and other foreign companies that import their oil. Kornfeind views this scenario as more likely. But Croft is unsure. “There are all these things that we could do if we really wanted to punish countries that are taking [Russia’s oil]. But we don’t do the easy stuff.”
(Kim)
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