The Stock Market’s Momentum Is Stalling With Mag 7 Earnings on Deck

Gains in the Magnificent Seven have outstripped those in the S&P 500 this year. (Michael M. Santiago/Getty Images)

U.S. stocks are trading near record highs heading into the thick of the second-quarter earnings season, but with markets historically expensive and reliant on the performance of tech companies, some investors are starting to embrace a more cautious outlook.

The S&P 500 has gained around 19% over the past three months. It hit its tenth record high of the year Monday as investors continue to bet that solid corporate earnings, a resilient economy, and Federal Reserve rate cuts will offset the impact of President Donald Trump’s tariffs.

That gain, however, has been largely powered by megacap tech stocks, according to data from Wisdom Tree. The so-called Magnificent Seven have surged 27%, compared with an 11% gain for the remaining stocks in the benchmark over the same period.

Richard Saperstein, chief investment officer at Treasury Partners, a New York based investment group, thinks this outperformance is justified.

“Most of the Mag Seven should continue leading the market due to impressive earnings growth, copious levels of cash flow and continued demand for their businesses,” he said. “The AI tailwinds are in the early innings, and are set to benefit the biggest players in tech the most.”

On Monday, stocks advanced heading into a busy earnings week, with updates from around a fifth of the S&P 500. But some broader market indicators are starting to signal caution.

Around 81% of the 59 companies reporting by the close of trading on Friday have topped analysts’ earnings forecasts, according to LSEG data, well ahead of the four -quarter average of around 76%. But profit gains have outpaced revenue, suggesting a weaker U.S. dollar has powered a hefty portion of the overall earnings gain.

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, described the opening week of the earnings season as “fine but not fabulous.” She said she was left “wondering if investors generally got what they expected but were hoping for a bit more.”

“We look forward to learning additional details about tariff management and overall company outlooks in the weeks ahead,” she said. “So far, our concern that investors have been too quick to write off tariff impacts hasn’t been alleviated.”

She also noted that price moves in the wake of last week’s earnings releases were small in historical terms, even for companies whose earnings topped Street forecasts. That could point to another concerning factor in the market, which is largely flat over the past two weeks.

Calvasina sees a stall in what is known as the “momentum trade,” in which investors bet on recent winners continuing to outperform the broader market. It has been cited as a crucial factor in the market’s searing spring rally, which came despite a series of mixed economic data and hawkish Fed rhetoric on interest rates.

Bloomberg’s U.S. Pure Momentum factor index, which has been highly correlated to the S&P 500, is starting to retreat and “has caught our traders’ eyes,” Calvasina said. “It’s worth noting in recent drawdowns that the momentum factor has peaked ahead of the S&P 500, anywhere from a few days to several weeks,” she said.

Some of that lost momentum could be tied to less upbeat forecast for earnings at megacap companies. Bank of America estimates suggest the gap between earnings growth for the Magnificent Seven and the rest of the S&P 500 will narrow sharply over the coming quarters, with a possible convergence in the latter part of next year.

Set against the broader market’s high valuation, with the S&P 500 trading at 22.4 times the earnings it will generate over the next four quarters, it’s easy to see why some investors are cautious heading into the first of the Mag Seven earnings later this week. Earnings from Tesla and Alphabet are expected after the close of trading on Wednesday.

Calculations from WisdomTree indicate the so-called equity risk premium—the extra return investors can get by being in stocks rather than safe Treasury debt—is just 2.16 percentage points, the lowest since the early 2000s.

“The stock market’s relatively modest gains last week despite mostly solid economic data and earnings could be a preview for much of the rest of the year,” said Daniel Skelly, head of Morgan Stanley’s Wealth Management Market Research team.

“With a decisive resolution (to tariff uncertainty) unlikely in the near term and the Fed holding the line on rate cuts, price action at the index level could remain congested,” he added. “It continues to be a stock picker’s market.”

Write to Martin Baccardax at martin.baccardax@barrons.com