MW The 'Magnificent Seven' companies just did something they haven't in two years. Goldman says it's time to make a shift.

By Barbara Kollmeyer

It's the first quarter in many those tech companies haven't offered earnings surprises

It's a sea of green this morning - congrats Eagles fans - with Wall Street also pointing to a higher start, led by tech. If that positive vibe holds, it will mark the first Monday in a while that the markets haven't seen whiplash from newsy headlines.

And that's despite expectations for more from Trump tariffs this week.

Our call of the day comes from Goldman Sachs, where a team of strategists led by David Kostin suggests shifting around in the hot AI sector after finding an oddity while peeking under the hood of the current earnings season for major technology companies.

"This marks the first quarter with no positive sales surprises for the ['Magnificent Seven'] since 2022," Kostin and his team told clients in a recent note.

Remindingly, we've heard from all of those big technology companies (plus Broadcom Inc. $(AVGO)$) with the exception of Nvidia Corp. $(NVDA)$, which will offer possibly the last chance for the group to get at least one surprise on the board when it reports later this month.

Observe Goldman's chart:

Backing up a bit, the strategists explained that over the past few years, major technology companies have been a "pillar of S&P 500 SPX sales and earnings growth." But the expanse of those surprises has been waning, while participation from the remaining 493 companies has broadened.

Another way to look at this is via earnings per share, where Goldman strategists pointed out the gap between major technology companies and the S&P 493 narrowed to 19 percentage points from a peak of 66 in the final quarter of 2023.

Kostin and co. said the relative performance of the big tech names will take a haircut this year. "The outperformance of the Magnificent 7 has historically reflected its earnings superiority. 2025 bottom-up estimates imply the excess earnings growth of the Magnificent 7 will narrow from 32 pp [percentage points] in 2024 to 6 pp in 2025 and 4 pp in 2026," the strategists said.

So what's there to do about the lack of surprises from the technology giants? Their advise is to keep shifting exposure to AI Phase 3 from AI Phase 2 companies.

Goldman has previously explained that Phase 3 companies are those with the potential to monetize AI through generating incremental revenues, mostly in software and IT services. Phase 2 represents the more popular chips, cloud providers, security software, data-center REITs, hardware and equipment and utilities.

In a note to clients in October, Goldman strategists suggested investors stay selective within the Phase 3 batch, flagging so-called "platform" stocks, such as databases and development tools, which "allow the best use of AI infrastructure while providing building blocks to construct next generation applications."

Their favorites were Microsoft Corp. $(MSFT)$, Datadog Inc. (DDOG), MongoDB Inc. (MDB), Elastic NV $(ESTC)$ and Snowflake Inc. (SNOW)

A few final words from those Goldman strategists - tariffs remain a downside risk to their 2025 earnings-per-share forecast of $268, with every 5-percentage-point increase in the U.S. tariff rate cutting S&P 500 EPS by roughly 1% to 2%.

But even amid that near-term uncertainty, Kostin and his team said that expectations for a "healthy fundamental outlook will ultimately drive the S&P 500 7% higher to our year-end price target of 6500. "

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are higher, with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y steady and the dollar DXY also slightly up.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              6025.99    -0.24%  3.41%   2.45%   19.88% 
   Nasdaq Composite                                                     19,523.40  -0.53%  1.89%   1.10%   22.09% 
   10-year Treasury                                                     4.491      -7.30   -29.60  -8.50   30.50 
   Gold                                                                 2913       2.19%   8.64%   10.37%  43.23% 
   Oil                                                                  71.51      -1.13%  -9.23%  -0.50%  -7.06% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

McDonald's Corp. $(MCD)$ will report results ahead of the market open.

BP PLC's stock $(BP)$ is soaring on reports that hedge fund Elliott is taking a stake.

Tesla Inc. $(TSLA)$ is a standout decliner this morning. Some have pointed to a widely shared post on X showing a Cybertruck that crashed into a pole. The driver says he was using Full Self-Driving technology.

President Trump plans to announce 25% tariffs on steel and aluminum imports as soon as Monday, and reciprocal tariffs this week.

Trump also said Elon Musk's DOGE team has found irregularities with Treasurys, adding, "Maybe we have less debt than we thought."

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The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia Corp. 
   TSLA    Tesla Inc. 
   PLTR    Palantir Technologies Inc. 
   GME     GameStop Corp. 
   MGOL    MGO Global Inc. 
   SMCI    Super Micro Computer Inc. 
   AMZN    Amazon.com Inc. 
   TSM     Taiwan Semiconductor Manufacturing Co. 
   BBAI    BigBear.ai Inc. 
   AMD     Advanced Micro Devices Inc. 

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-Barbara Kollmeyer

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February 10, 2025 06:51 ET (11:51 GMT)

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