Business Insights and Market Implications Analysis

Summary

• The Magnificent-7 (Mag-7) delivered strong Q4 2024 earnings growth but with a declining contribution to S&P 500 earnings growth.
• Mag-7 earnings growth is expected to fall from 36.8% in 2024 to 17.1% in 2025, while the broader S&P 500 (excluding Mag-7) is projected to grow by 9.2%.
• The Mag-7's contribution to total S&P 500 earnings growth dropped from 52% in 2024 to an expected 33% in 2025.

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Q4 2024 Earnings Performance

• Aggregate Earnings: $131.2 billion (all-time high), up 31.7% year-over-year (YoY).
• Revenue Growth: $509.0 billion, up 12.8% YoY (lowest since Q2 2023).
• Net Profit Margin: 25.8% (all-time high vs. S&P 500's 13.4%).

Key Contributors:

• Nvidia, Amazon, and Meta accounted for 73% of Mag-7 earnings growth in Q4.
• Nvidia led with the highest earnings growth contribution for six consecutive quarters.

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Valuation and Market Premium

• Forward P/E Ratio: Mag-7 at 28.3x vs. S&P 500 at 19.7x (excluding Mag-7).
• Forward P/S Ratio: Mag-7 at 7.2x vs. S&P 500 at 2.0x (excluding Mag-7).

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Earnings Surprises and Analyst Sentiment

• Aggregate Earnings Surprise: 7.3% for Mag-7, slightly above the S&P 500's 7.0%.
• Revenue Surprise: 0.5%, the lowest since Q4 2022, indicating analyst expectations are now more accurate.

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StarMine Model Insights

• Valuation Models: All Mag-7 companies scored low (red) on relative valuation and intrinsic value metrics.
• Analyst Sentiment:
  • Nvidia led with a score of 99, while Tesla dropped to 13 due to negative analyst revisions.
  • Earnings Quality (EQ): Mag-7 companies held neutral to bullish scores, except Tesla.

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Lipper Fund Flows and Market Rotation

• 2024 Fund Flows: £64.4 billion into U.S. ETFs, with 84.4% going to cap-weighted funds and 15.6% to equal-weighted funds.
• Q4 Surge in Equal-Weighted ETFs: November saw £3.49 billion inflows into equal-weighted ETFs post-election.
• 2025 Fund Flows: Net outflows of £68 million in February, marking the first net outflow in 23 months.

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Market Implications and Competitive Dynamics

• Declining Growth Contribution: Mag-7's earnings growth is expected to slow, with broader S&P 493 companies taking a larger role.
• Valuation Premium: Despite moderation, Mag-7 remains expensive relative to the broader market.
• Fund Flow Shifts: Increasing interest in equal-weighted ETFs signals potential market rotation away from mega-cap tech stocks.

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Long-Term Effects and Regulatory Considerations

• Structural Advantages: Mag-7's profitability and market dominance are expected to persist, with projected 2025 profit margins of 25.3%.
• Regulatory Risks: Not explicitly mentioned but implied by the premium valuation and potential market rotation dynamics.

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Conclusion

The Mag-7 remains highly profitable but faces declining growth contribution to broader market indices. Investors should monitor fund flow shifts and valuation premiums, as market rotation dynamics may intensify in 2025.