Bets on the US stock market rally broadening out beyond a handful of tech behemoths this year are bumping into a familiar reality: Those same megacaps remain Corporate America’s most likely source of profit growth.

Tech’s fourth quarter earnings season kicks off this week with results from Netflix Inc., Tesla Inc. and Intel Corp. The so-called Magnificent Seven are expected to deliver combined profit growth of about 46%, according to data compiled by Bloomberg Intelligence. That’s down slightly from the third quarter’s 53% expansion, but it still dwarfs almost all of the main sectors in the S&P 500 Index.

Considering how important these companies are to the overall stock market — they accounted for virtually all of last year’s 24% advance and drove the S&P 500 to an all-time high on Friday — earnings season doesn’t quite get going until they show up with their results.

“The dominant growth in the market is coming from Big Tech,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “If they disappoint, that’s a real risk to the overall market.”

Bulls are banking on strong earnings reports to rekindle a rally in the S&P 500 Index that has slowed a bit to start the year after 2023’s torid pace. Apple Inc., Microsoft Corp., Alphabet Inc.,, Nvidia Corp., Tesla and Meta Platforms Inc. accounted for about two-thirds of that gain.

Apple, one of the pillars of last year’s rally after adding nearly $1 trillion in market value, has limped out of the gate in 2024 amid concerns about its growth prospects. Its most innovative product in years, the $3,499 Vision Pro headset, is set to begin shipping next month but is unlikely to provide a jolt to sales any time soon.

Meanwhile, Microsoft has pushed deeper into record territory on rising expectations that its expanding lineup of AI-infused software products will fuel bigger profits. The Redmond, Washington-based company said on Jan. 15 it will charge $20 a month for a consumer version of its AI assistant.

Changing Leadership
Looking at the stock market as a whole, the S&P 500 has had a bumpy ride to start the year, falling in early January before rising to a new record on Friday. Investors are trying to assess the strength of the US economy and determine when the Federal Reserve will start cutting its benchmark interest rate, which is sitting at the highest since the dot-com era.

The S&P 500’s leadership has changed in recent weeks, with Advanced Micro Devices Inc., Broadcom Inc., Eli Lilly & Co. and Merck & Co. among the most prominent point gainers so far in 2024. Meanwhile Tesla, which is down more than 15% since New Year’s, has become the heaviest drag on the S&P, with Apple close behind.

For tech investors, one big question is how much the AI craze will contribute to earnings and then spill over into stock prices. Nvidia, which is the best stock in the S&P 500 this year and last, dominates the market for chips used in AI computing and is expected to post fourth-quarter profits of more than $10 billion, up from $1.4 billion a year ago.

Without Nvidia, the S&P 500 Information Technology Index’s projected fourth quarter profit growth would be more than cut in half, according to Wendy Soong, an analyst with Bloomberg Intelligence.

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