Goldman Sachs: "No More Surprise Revenue for the Magnificent 7"

Shift in Tech Growth Dynamics as AI Stage 3 Companies Gain Focus / AFP

Goldman Sachs has revealed that the "Magnificent 7" companies, which have driven the U.S. stock market for over two years, failed to deliver surprise revenue growth this quarter. According to MarketWatch on February 10, this marks the first earnings season since 2023 where major tech giants haven’t surpassed Wall Street’s revenue expectations. Goldman Sachs’ strategist team, led by David Kostin, highlighted this trend, noting that Nvidia is an exception as it will report earnings later this month.

The Magnificent 7—consisting of leading tech firms—had consistently outperformed Wall Street’s consensus since Q1 2023, reporting revenue approximately 2.5% higher than expectations. However, in the current earnings season for Q4 2024, the combined revenue growth of the group (excluding Nvidia) has merely met the consensus, showing no significant upside surprise. Analysts point out that while these tech giants were the cornerstone of revenue and profit growth for the S&P 500 in recent years, there’s now a noticeable shift as the remaining 493 companies in the index play a more active role in driving growth.

This shift is evident in the narrowing earnings per share (EPS) gap between major tech firms and the broader S&P 493 companies. Goldman Sachs strategists reported that the EPS gap, which peaked at 66% in Q4 2023, has now narrowed to 19%. The firm predicts that the relative performance of large tech companies will continue to slow down. The revenue growth premium of the Magnificent 7 compared to the rest of the S&P 500 is expected to shrink from 32 percentage points in 2024 to just 6 percentage points in 2025, and further down to 4 percentage points in 2026.

In response to these changing dynamics, Goldman Sachs recommends investors shift their focus from AI Stage 2 companies to AI Stage 3 companies. According to Goldman’s previous reports, AI Stage 3 firms primarily operate in software and IT services, with strong potential to monetize AI technologies. In contrast, AI Stage 2 companies include popular chipmakers, cloud service providers, cybersecurity firms, data center REITs, hardware manufacturers, and utilities.

For investors looking to capitalize on the evolving AI landscape, Goldman Sachs suggests focusing on 'platform' stocks within AI Stage 3 companies, such as database and development tools providers. These companies offer the foundational building blocks necessary to maximize AI infrastructure and develop next-generation applications. The firm’s top picks include Microsoft (MSFT), Datadog (DDOG), MongoDB (MDB), Elastic NV (ESTC), and Snowflake (SNOW).

However, Goldman Sachs also cautioned that Trump’s proposed tariffs pose a downside risk to S&P 500 earnings forecasts. They estimate that for every 5-percentage-point increase in U.S. tariff rates, S&P 500 EPS could decline by approximately 1–2%. Despite these short-term uncertainties, Goldman Sachs remains optimistic about the broader U.S. economic outlook, predicting that strong fundamentals will drive the S&P 500 up by 7% this year, potentially reaching their year-end target of 6,500 points.

This analysis reflects a pivotal shift in the global investment landscape, where traditional tech giants face growth saturation, while new opportunities emerge in AI-driven sectors, reshaping future market dynamics.