Mag 7 Members Report Strong Earnings, Double Down on CapEx

Zacks

02-06

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

Total earnings for the 245 S&P 500 companies that have reported results are up +11.6% from the same period last year on +5.1% higher revenues, with 80.0% beating EPS estimates and 66.9% beating revenue estimates.

The picture emerging from the 2024 Q4 earnings season continues to be one of strength and improving outlook, with the companies not only coming ahead of estimates but also providing reassuring guidance for the coming quarters.

For the Tech sector, we now have Q4 results for 68.3% of the index’s market capitalization in the S&P 500 index. Total earnings for these companies are up +23.2% from the same period last year on +8.8% higher revenues, with 88.9% beating EPS estimates and 77.8% beating revenue estimates. This is a notably better performance from these Tech companies relative to other recent periods.

Looking at 2024 Q4 as a whole, combining the results for the 112 index members that have come out with estimates for the still-to-come companies, total S&P 500 earnings are currently expected to be up +11.9% from the same period last year on +5.3% higher revenues.

Spending Like Drunken Sailors

Alphabet GOOGL became the latest member of the Mag 7 club to stick to its ever-rising spending on building out its artificial intelligence infrastructure. This is in line with the trend we saw earlier from Microsoft MSFT and Meta Platforms META, who showed no inclination of having second thoughts on their equally aggressive AI-focused spending plans in the wake of China’s DeepSeek results.

Alphabet plans to spend +47% more this year, with a capex budgeted target of $75 billion. Meta and Microsoft plan to spend $60 billion and $80 billion on capex, with many analysts projecting an even bigger final tally for Microsoft.

Alphabet shares were down following the release, but the market’s disappointment had more to do with trends in the company’s business. Microsoft had issues in its cloud business as well that weighed on the stock price following its quarterly release.

The cloud issue may have been the primary contributor to the market’s negative reaction to the Alphabet and Microsoft reports, but it’s fair to assume that investors would have liked to see some humility and introspection from these Tech leaders, given the uncertain payoff.

Capex questions aside, we must remember that the Mag 7 players are extraordinarily profitable and still growing impressively. Alphabet’s Q4 earnings increased +28.3% from the year-earlier period to $26.5 billion on a +12.9% increase in revenues to $81.6 billion. In comparison, Microsoft’s Q4 earnings were up ‘only’ +10.2% from the year-earlier level to $24.1 billion, with Meta earnings also increasing +48.7% to $20.8 billion.

In essence, the primary justification that these companies have put forward for these huge capex plans is to ensure their primacy in the coming artificial intelligence world, which will be critical to the sustainability of their enormous earnings power.

For Q4, Mag 7 earnings are expected to be up +26.1% from the same period last year on +12.4% higher revenues, as the chart below shows.