Tech Giants Lead S&P 500 Surge, $273B Market Boost Ahead

Key Takeaway

• "Magnificent Seven" tech giants drive S&P 500's strongest profit surge since Q2 2022, with earnings growth expected to exceed 49%.
• Large cap companies maintain strong margins despite high interest rates, showcasing financial resilience over smaller firms.
• Federal Reserve's QT scale-back and Treasury's liquidity management expected to inject $273 billion into the market by end of September.

Earnings Season Surprises

The first quarter of 2023 has marked a significant period for the S&P 500, with an unexpected surge in profits, the strongest since the second quarter of 2022. This growth has been predominantly driven by the performance of the "Magnificent Seven" - Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., and Tesla Inc., with Nvidia Corp. expected to report soon. Despite facing challenges from Tesla and Meta Platforms, the collective earnings of these tech giants are anticipated to exceed a 49% growth rate, a stark contrast to the nearly 14% growth observed in the same period last year. This performance highlights the strategic agility of these companies in overcoming the hurdles posed by rising inflation and interest rates, showcasing their resilience and dominance in the market.

Margins Defy Interest Rate Pressure

In the current economic climate, characterized by persistently high interest rates, the ability of large cap companies to sustain strong profit margins is particularly notable. Andrew Lapthorne from Societe Generale points out that the minimal leverage on the balance sheets of these companies, along with the slow turnover of fixed debt, has shielded them from the brunt of rising rates. This financial resilience is less apparent in smaller companies, which are more susceptible to the adverse effects of higher leverage and floating debt. Consequently, the performance of large cap stocks, especially those outside of China, has been remarkably robust, continuing to outshine their smaller counterparts in the global market.

Liquidity Dynamics and Market Implications

The landscape of market liquidity has been under close scrutiny, especially considering recent adjustments in taxation flows and the Treasury General Account (TGA). The Federal Reserve's unexpected decision to scale back its Quantitative Tightening (QT) purchases from $60 billion to $25 billion represents a significant pivot. Coupled with the Treasury's preference for short-term bills over long-dated bonds, these moves are designed to bolster market liquidity. According to Dan Clifton of Strategas Research Partners, these policy adjustments are expected to inject an additional $273 billion of net liquidity into the market by the end of September, potentially bolstering the economy in the lead-up to the US election. This approach to liquidity management is seen as a conservative strategy aimed at maintaining market stability and averting financial crises, rather than being driven by political motives.

Street Views

• Bank of America Corp. Analysts (Neutral on the Magnificent Seven):

  "In the future, Bank of America Corp.’s analysts expect Mag Seven earnings to slow, while everyone else’s profits should accelerate."