Welcome to your earnings Friday edition of What My System Says Today.
Earlier this week, I wrote about the impact the Magnificent 7 stocks are having on the latest rally in the S&P 500.
(Pro tip: If you missed that piece, you can read it here.)
These seven mega-cap tech stocks have been the primary catalyst for the market rally.
Since 2019, the Magnificent 7 stocks have gained 1,008.4%, compared to the remaining 493 stocks in the benchmark, which have gained only 140.2% during the same period.
The caution here is that any slowdown by any one, or combination, of these stocks would precipitate an overall market clawback.
Now that each of these seven stocks has reported its Q3 earnings, I analyzed just how those earnings stack up against the rest of the benchmark.
The end results may surprise you…
While the Magnificent 7 stocks are outpacing the other 493 stocks in the S&P 500 in terms of earnings, their Q3 earnings growth is the lowest since Q1 2023.
Mag 7 stocks grew earnings at a rate of 18.4% — down significantly from the previous quarter’s 26.6% growth rate.
On the other hand, the other 493 companies in the benchmark grew their earnings from 8.2% in Q2 to 11.9% in Q3. It’s just the second time in three years that the non-Mag 7 stocks have reported double-digit earnings growth.
Not to be understated, but four of the Mag 7 stocks (NVDA, GOOGL, AMZN and MSFT) are among the top seven contributors to earnings growth for the S&P 500.
The other three are Eli Lilly & Co. (LLY), Uber Technologies (UBER) and Intel Corp. (INTC).
All of that said, analysts expect further earnings growth from the Magnificent 7 stocks through Q3 2026.
Now, let’s switch focus and look at potentially “bullish” earnings calls for next week…
“Bullish” Earnings to Watch
These stocks are expected to beat their previous quarter’s earnings per share (EPS), and thus, if those expectations are met or exceeded, they could potentially trade higher.
For this screen, stocks must meet four criteria:
- 10 or more analysts cover the stock.
- The average analyst recommendation is a “Buy.”
- It BEAT analysts’ EPS estimates for the previous quarter.
- The average analyst estimate for the current quarter’s EPS is greater than the previous one.
Here are four companies that made this week’s list:
Despite its stock being in a substantial decline (it’s just 4.9% off its 52-week low), Adobe Inc. (ADBE) has beaten earnings and sales expectations in each of the last five quarters.
However, it’s important to note that those sales and earnings surprises were only by 1% to 3%.
Adobe is leaning heavily into artificial intelligence to complement its suite of creator products.
It recently announced a partnership with HUMAIN, a public investment fund in Saudi Arabia to build personalized generative AI models and AI-powered applications geared toward the Middle Eastern culture.
Additionally, on the same day the partnership was announced, Adobe announced that it was acquiring search engine optimization company Semrush Holdings (SEMR) for $1.9 billion.
This acquisition is designed to help marketers utilize agentic AI to better understand how brands appear across various channels.
While these two business points won’t impact Adobe right away, I do believe the company will continue to beat earnings and sales estimates, but only by a small margin.
A beat here for ADBE would go a long way to pulling the stock up from its “bearish” rating on Adam’s Green Zone Power Ratings system.
Now, let’s look at potentially “bearish” earnings for next week…
“Bearish” Earnings to Watch
For our “bearish” earnings screen, we’re only looking for two things:
- 10 or more analysts must cover the stock.
- The average analyst estimate for the current quarter’s EPS is less than the previous quarter’s.
We want companies that are covered by a sufficiently large group of Wall Street analysts who collectively expect the company to report a quarter-over-quarter decline in earnings.
Here are two companies that passed this screen:
Another stock that has been in decline (currently 6.2% off its 52-week low) is Costco Wholesale Corp. (COST).
Analysts are estimating a $1.59 decline in EPS from the previous quarter.
I suspect this downward estimate is due to the increasing costs of products because of tariffs.
The higher the tariffs, the higher the costs to a wholesale retailer like Costco.
Retailers across the board, from discount stores like Ross Stores Inc. (ROST) and Kohl’s Corp. (KSS).
I don’t think Costco is any different.
I see the company beating the EPS estimates (as they have in four of the last five quarters), but it will still be a decline from the previous reporting period.
Falling EPS won’t help COST’s already “Neutral” rating on Adam’s Green Zone Power Ratings system.
That’s all from me today.
I hope you all have a great weekend.
Until next week…
Safe trading,
Matt Clark, CMSA®
Chief Research Analyst, Money & Markets