Expectations for strong profit growth from the Magnificent Seven tech stocks are part of the reason the S&P 500 is trading near record levels, but a few factors could cause their earnings to increase slower than investors have penciled in. 

Sales are growing quickly across most of the group— Nvidia, Tesla, Apple, Meta Platforms, Alphabet, Microsoft, and Amazon.com—as companies in a variety of sectors adopt artificial intelligence-related technologies. AI software from Microsoft, Alphabet, and Amazon is in favor, which is boosting demand for Nvidia’s chips. Meta Platforms has been taking market share in digital advertising, using AI to enhance the user experience and value to the advertiser.

And some analysts consider Tesla an AI stock as it works to develop self-driving cars. Even Apple, whose latest financial forecasts implied a 5% year-over-year decline in revenue in the current quarter, says it is investing in AI, though it has yet to disclose details of that strategy. 

The push from AI, plus those companies’ commanding positions in their other businesses, is why analysts currently expect the group to achieve aggregate annualized net income growth of just over 15% over the next three years, according to Barron’s calculations based on FactSet consensus forecasts. The comparable figure for the S&P 500 is in the low double digits.

That means the Magnificent Seven are still viewed as a group of growth stocks. They can continue to outperform the S&P 500, rising in line with their earnings growth, so long as the market remains willing to pay as much per share for their near-term earnings as it has been.

That is where the risk lies.

While earnings for the group will increase, there is a reasonable probability that the growth will slow down. If the market focuses on that danger, the valuations of the stocks could drop, holding back their share- price performance. Signs of slower growth could also mean that analysts will quickly reduce their forecasts for earnings, which would also send their stocks downward.  

The reality is that profit growth for the Magnificent Seven goes through its own cycles. In early 2017, growth in net income for the trailing 12- month period was 35%, according to Trivariate Research, but it slowed to 15% in 2019 as trends such as smartphones, social media, digital advertising, and cloud software began to mature. 

in 2020, 12-month earnings growth rose to nearly 45% as the pandemic forced people to work from home, bringing a boom in online shopping via Amazon, plus a surge in social media use, streaming, and cloud computing.

That burst of growth didn’t last, partly because the pandemic had already boosted earnings so dramatically. An additional challenge was that the Federal Reserve began raising interest rates to combat inflation in early 2022, slowing down spending by both consumers and businesses. By late 2022, net income growth for the trailing 12 months had come in at just over 5%.