Russell Investments forecasts third-quarter earnings growth for the S&P 500’s 493 at 27.7% versus 20.3% for the Magnificent Seven (estimates, not reported results) a direct contrast with the second quarter’s pattern when the Magnificent Seven’s profits roughly doubled while the rest grew about 30%.
A forecast reversal, not a settled result
Russell Investments forecasts that third-quarter earnings for the S&P 500’s 493 non-mega-cap members may rise 27.7%, versus an estimated 20.3% for the Magnificent Seven, and those figures are estimates, not reported results 27.7%.
FactSet’s reported second-quarter results, by contrast, showed the Magnificent Seven’s earnings roughly doubled while the rest of the index’s profits expanded by about 30%: a comparison based on actual Q2 results, not Q3 forecasts doubled / 30%.
The two comparisons differ in timing and basis: Russell’s numbers are forward estimates for Q3 and split the S&P 500 into the Magnificent Seven and the other 493 stocks, while the FactSet figures describe what actually happened in Q2 for the broader index.
Why breadth could improve, and why it may not
BeiChen Lin of Russell Investments says earnings breadth could widen because many non-hyperscaler companies trade at cheaper valuations and corporate fundamentals look solid. Those firms may look relatively attractive if earnings pick up cheaper valuations.
FactSet also reports an unusually large number of companies issuing positive guidance for the third quarter (72 companies) which would support the idea that profit growth is broadening across sectors in the US 72 companies.
Strategists point to financials, health care and smaller-company groups as potential sources of stronger earnings outside the mega-caps. Yardeni Research notes midcaps and smallcaps have healthy expected earnings growth for the year, suggesting profit momentum below the largest names midcap/smallcap growth.
There are clear headwinds. Market leadership is narrow: only a handful of mega-caps have driven headline index gains while many stocks lag, leaving breadth weakened and roughly 38% of S&P 500 names down 20% or more from their 52-week highs, according to market measures cited by strategists 38% off highs.
Macroeconomic pressure is another risk. The recent surge in US Treasury yields (the 10-year hit a 24-year high above 5.36% in September) and higher oil prices have already reshaped sector performance and could erode sentiment even if earnings grow, because rising yields reduce the present value of future profits 10-year yield.
Bank of America and others warn profit growth is highly concentrated: five companies account for a large share of next-12-month S&P earnings, raising the risk that strong headline earnings still mask a fragile, single-sector story in the US market five stocks, concentration.
Analysts also caution broader earnings growth need not translate into broader share-price gains. Earnings surprises or upward revisions can be priced in unevenly, leaving many beaten-down names vulnerable to macro shocks even if corporate results improve may not translate.
What to watch as results arrive
Look first at actual versus forecast earnings growth for the S&P 500’s non-mega cohort and the Magnificent Seven, because the Russell estimates can change a lot as companies report: analysts’ numbers are updated in real time as beats and misses come in Russell estimates may change.
Revenue trends and management guidance matter more than single-quarter beats: note how many firms revise forward guidance upward or downward, because FactSet counts of positive guidance this quarter are a key input to the case for broadening earnings positive guidance count.
Watch sector-level results to see whether financials, health care, midcaps and smallcaps actually add to profits: those groups are the hypothesised sources of breadth if Russell’s forecast is right midcap/smallcap and sector contributions.
Check whether outperformance extends beyond a handful of mega-caps: if only five stocks continue to supply most of the index’s earnings, headline profit growth will overstate market-wide strength and breadth will remain poor concentration risk.
Finally, use the calendar as context: the US reporting season begins this week with PepsiCo and Delta, major banks report in the week of 13 October, and the peak reporting week is usually the final week of October when Apple and Amazon typically report: these dates will be when many forecasts are revised and the market’s breadth question gets its clearest test reporting calendar.
The coming weeks will test whether third-quarter profit estimates that favour the broader S&P 493 over the Magnificent Seven hold up in reported results. Watch whether any rise in earnings brings more stocks with it, or merely confirms another quarter driven by a narrow few.
This article was created with AI assistance.
