(Bloomberg) — The focus on artificial intelligence is spreading to stocks beyond US technology heavyweights, boosting analysts’ earnings estimates for a broader array of S&P 500 companies.
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Mentions of AI adoption on fourth-quarter earnings calls reached a record high, according to an analysis by Morgan Stanley strategist Michael Wilson. While the software sector had the most mentions overall, financials, media and entertainment companies also featured prominently.
The strategist — among the most bearish voices on US stocks until mid-2024 — said that productivity benefits from AI are a “key structural catalyst” for his optimistic view on industries ranging from software and financials to consumer services like hotels, restaurants and leisure companies.
Buzz around AI has driven more than 20% gains for the US benchmark in each of the past two years. But a lot of that advance has been concentrated in the handful of tech stocks deemed the Magnificent Seven.
This group — comprising Nvidia Corp., Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Tesla Inc. — also outperformed on earnings growth in 2023 and 2024, but analysts expect the remainder of the S&P 500 index to catch up in coming quarters.
Data compiled by Bloomberg Intelligence show profit growth at the Magnificent Seven is expected to have slowed to less than 30% in the fourth quarter from a peak of 57% in the same quarter of 2023. At the same time, earnings for the rest of the index — the so-called S&P 493 — are estimated to have jumped 8.5% in the current reporting period from a drop of 1.7% the prior year.
“The superior earnings growth and returns of the Magnificent 7 relative to the S&P 493 will narrow” in 2025, Goldman Sachs Group Inc. strategist David Kostin wrote in a note.
Read: Magnificent Seven’s Slowing Growth Threatens S&P 500 Rally
On an earnings-per-share basis, the gap between the tech heavyweights and the other 493 stocks dropped to 19 percentage points in the fourth quarter, the smallest since early 2023, Kostin wrote. Consensus estimates suggest further narrowing — to 6 percentage points in 2025 and 4 percentage points in 2026, the strategist said.
“The Magnificent 7 has been a pillar of S&P 500 sales and earnings growth during the last few years, but the magnitude of surprises has declined and participation from the other 493 stocks has broadened,” Kostin said.
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