Finally, there has been a change in the profit situation of the US stock market!

As the second quarter earnings season for US companies comes to a close this year, there is a subtle change in the profit landscape of US stocks that have long been dominated by tech giants.

In the past few quarters, the profit growth of the Mag7 in the tech industry has been the main driving force behind the rise of the S&P 500 index. However, the latest data shows that excluding these seven tech giants, the earnings of other companies' stocks in the S&P 500 are expected to see growth for the first time since the fourth quarter of 2022.

Analysis indicates that this broader profit growth is a good thing as it provides investors with more investment opportunities, no longer limited to just a few tech stocks, thus making the market more balanced.

Investors are closely watching the financial data of retail giants such as Home Depot, Walmart, and Target, as they directly reflect the consumption situation of American consumers. In addition, Nvidia will also release its earnings report on the 28th of this month.

"Growth Diffusion": Small Companies Emerging

In summary, the new situation in the US stock market can be described as "growth diffusion," where the profit growth of large companies is slowing down, while small companies are starting to show strong performance.

According to data from BI, excluding the Mag7 from the S&P 500 index components, profit is expected to grow by 7.4% year-on-year in the second quarter, a positive signal after five consecutive quarters of decline. The profit of Mag7 is expected to grow by 35%, still strong, but significantly slower compared to the high growth of the past year.

Therefore, analysts believe that investors are more likely to shift from large-cap stocks to small-cap stocks and previously underperforming stocks because they have higher growth potential. The US CPI data for July released on the 14th will prove this point, as investors may reassess the valuation of tech stocks and look for other investment opportunities.

Stuart Kaiser, head of stock trading strategy at Citigroup, said that the diffusion of profits is one of the reasons why it is expected that stocks other than the seven tech giants will perform better this year:

More company profit growth means that overall market profit growth is no longer scarce, supporting a wider range of stocks to participate in the market rally. However, this phenomenon may only appear intermittently this year.

AI Enthusiasm Wanes

The AI sector, with high expectations and soaring stock prices, may be disappointing investors.

So far, the financial performance of major players in the artificial intelligence field has been lukewarm at best. People are concerned that the billions of dollars invested may not bring returns quickly. Amazon, Microsoft, and Alphabet have been disappointing as their financial outlook either falls below expectations or lacks specific details.

Due to the lack of significant revenue growth from AI projects, companies may cut back on AI spending. Stuart Kaiser, Bloomberg Intelligence strategist, said:

If the economy is weakening, companies need to maintain profit margins, so AI spending will be the first to be restricted as it generates little revenueOn the contrary, Meta has performed well, with strong results in artificial intelligence, exceeding expectations in the second quarter. Apple also stated that new artificial intelligence features will stimulate iPhone upgrades in the coming months to help overcome the sales slowdown.

"This quarter, the main focus for large-scale enterprises is the monetization of artificial intelligence," said Savita Subramanian, stock and quantitative strategist at Bank of America:

Companies with clear monetization trends have been rewarded, while others have been penalized.

The days of hype around artificial intelligence are over. It's now a story of "show me the results."

More companies report lower-than-expected revenue, but overall profit confidence improves

While overall profitability of US companies remains decent, their revenue performance is less than ideal. Compared to last year, more companies this year have failed to meet expected revenue levels.

Data shows that 21% of companies reported revenue below expectations, compared to 20% a year ago.

"The overall surprise rate for profits is close to the long-term average, but the surprise rate for revenue is below average," said Lerner of Truist. To meet profit targets, these companies have taken cost-cutting measures. In other words, companies' profits look good not because they are earning more, but because they are saving money.

However, overall, companies are more confident in their profit performance for the next three months, which is usually a positive market signal. BI predicts a generally positive trend in the third quarter: for the first time since 2021, there is a higher proportion of companies raising profit expectations than lowering them.

Data from Bank of America also shows a similar trend. Strategist Subramanian pointed out that analysts have maintained their average forecasts for 2024 and 2025. "This indicates that analysts are relatively satisfied with their estimates," she said