The S&P 500 just posted its best earnings growth in over three years. Blended earnings per share grew between 27.1% and 28.4% year-over-year in Q1, the strongest performance since Q4 2021, when the index clocked 32% growth.
The Magnificent Seven, that now-familiar group of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, drove much of the acceleration. Their collective EPS surged 63.2% year-over-year. But here’s the thing: the other 493 companies in the index aren’t just along for the ride anymore.
The underdogs are showing up
Non-Mag7 companies posted 17.4% EPS growth in Q1, their fastest clip in five years. Four of the top five contributors to Q1 earnings growth were Mag7 companies. Micron was the lone outsider cracking that top tier. And during a recent reporting week, Alphabet, Amazon, and Meta alone accounted for 71% of the incremental rise in net dollar S&P 500 earnings estimates.
Beat rates are running well above historical norms
Over 84% of S&P 500 companies beat EPS projections, while 81% surpassed revenue expectations. Both figures sit substantially above historical averages.
What this means for investors
The concentration problem in the S&P 500 has been a persistent worry. When a handful of mega-cap tech stocks account for a disproportionate share of index returns and earnings growth, any stumble from those names can drag the entire market lower.
The Q1 results suggest the base is widening. Non-Mag7 companies growing earnings at 17.4% means the index isn’t as fragile as it was when the other 493 were barely contributing. That’s a meaningful reduction in concentration risk, even if it hasn’t fully resolved the imbalance.
The Mag7’s 63.2% growth rate still dwarfs the 17.4% posted by everyone else. In Q4 2021, the last time overall S&P 500 earnings growth was this strong, the market was on the cusp of a brutal 2022 driven by rate hikes.
Alphabet, Amazon, and Meta are spending aggressively on data centers and compute infrastructure. As long as that spending generates returns, the earnings cycle can sustain itself.