S&P 500 third-quarter earnings are growing at a blended rate of 29%, according to FactSet’s latest analysis. Excluding just two companies, Micron and Nvidia, reduces that figure to 20%, showing how individual businesses can shape a market-wide headline.
The October 19 analysis does not show that the remaining companies are struggling. Indeed, the 493 businesses outside the group commonly called the Magnificent Seven have blended earnings growth of 27.7%.
It does show why the total, the breadth of growth and the reasons behind it need to be examined separately.
Much of the quarter is still an estimate
Blended earnings combine actual results from companies that have reported with estimates for those that have not. The 29% figure is therefore not a completed set of third-quarter accounts.
FactSet’s October 16 earnings-season update said only 9% of S&P 500 companies had reported actual third-quarter results. Ten of the index’s 11 sectors were reporting or projected to report year-over-year earnings growth.
That gives a broader view than the headline alone, but the balance between actual results and forecasts will change as companies publish their accounts. Earnings estimates can also be revised before those announcements.
Large contributors can move the aggregate
The Magnificent Seven refers to Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia and Tesla. The label groups seven large technology-related businesses, rather than describing seven identical operations.
FactSet estimates their combined third-quarter earnings growth at 33.2%. Excluding Nvidia and Meta reduces the remaining five’s growth rate to 7.5%.
That calculation concerns the seven-company group. It is separate from the Micron-and-Nvidia calculation for the entire S&P 500. Mixing up the two pairs would change the meaning of the findings.
A simplified hypothetical example illustrates how aggregation can conceal different experiences. Suppose two businesses earned $100 and $10 last year. If the larger one’s profit rises to $120 and the smaller one’s falls to $5, combined profit increases from $110 to $125, or approximately 13.6%.
The total has grown even though one business’s profit halved. This is an illustration of aggregation, not a reconstruction of FactSet’s calculation or a description of the actual quarter.
A rebound can reflect last year’s weakness
Year-over-year growth compares this quarter’s earnings with the same period a year earlier. An unusually low starting point can make the growth rate look especially large.
FactSet notes that prior-year charges at Meta, EchoStar and Boeing contribute to their current growth comparisons. That is different from establishing that every dollar of improvement comes from higher sales or better routine operating performance.
A one-time expense can depress the earlier period. If it does not recur, reported profit can rise substantially even without an equivalent improvement in underlying demand.
Readers therefore need to distinguish sales growth, operating performance and unusual accounting items. A strong comparison may be real while still providing limited evidence about how quickly the business can grow in future years.
Earnings contributions and index weights are different
Another distinction concerns the stock market index itself. In a market-capitalization-weighted index, larger listed companies carry greater weight. Market capitalization is the share price multiplied by the number of shares outstanding.
The US Securities and Exchange Commission explains this approach in its investor bulletin on index funds. A fund holding many companies can still have substantial exposure to its largest constituents.
However, a company’s influence on an index’s price movement is not the same calculation as its contribution to aggregate earnings growth. Share valuations, changes in profit and the previous year’s earnings all describe different things.
MBN’s coverage of company news and expectations of future stock returns examines a further distinction: better business prospects do not automatically imply higher future returns when expectations are already reflected in the price.
What the next results can clarify
As reporting progresses, the useful evidence will include whether growth extends across more companies, how revenue compares with profit and how much the results depend on unusual prior-year items.
The current figures show substantial expected growth beyond the largest technology names. The remaining question is how much of that forecast survives the full reporting season and what operating conditions produced it.
