The signs of a turnaround are unmistakable. For several quarters, earnings growth at the seven largest technology companies has been the engine of the S&P 500 index’s gains. That is about to change, as the rest of the benchmark stocks, with the exception of the so-called “Magnificent Seven,” are on track to post their first earnings growth since the fourth quarter of 2022, according to data compiled by Bloomberg Intelligence.

“This broader earnings power is positive because it gives portfolio managers more options than just a few stocks and creates a more balanced market,” said Keith Lerner, co-chief investment officer at Truist Advisory Services.

Although more than 80% of S&P 500 companies have already reported their earnings, key indicators of the health of the U.S. consumer — such as Home Depot Inc., Walmart Inc. and Target Corp. — have not yet released their numbers. The clues they provide about consumer spending will be closely watched as traders remain nervous about a potential economic slowdown. Additionally, Nvidia Corp., arguably the most important stock for investors interested in artificial intelligence, is scheduled to report earnings later this month.

Here are some of the highlights of the reporting season so far:

Expansion of growth

The biggest impact was slowing earnings growth among large-cap companies, while smaller names slowly picked up momentum.

The BI data shows that earnings for S&P 500 companies (excluding the Magnificent Seven) will rise 7.4 percent in the second quarter from the same period last year, after five straight quarters of declines. Earnings for mega-cap technology companies — Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., Tesla Inc. and Nvidia — are expected to rise 35 percent. While that’s a brisk pace, it represents a significant slowdown from last year’s even bigger gains.

If earnings power spreads across the market, it could exacerbate the already dramatic shift away from large-cap stocks and toward smaller companies and market laggards. Investors’ shift was triggered by lower-than-expected inflation in July.

“The earnings expansion theme was a key reason we thought equity performance would extend beyond the Mag-7 this year,” said Stuart Kaiser, head of equity trading strategy at Citigroup Inc. “More companies generating earnings would make EPS growth less scarce and support broader participation in equity performance. That has largely been sporadic this year, which has been frustrating for investors.”

Enthusiasm for AI shaken

The big disappointment came precisely where both expectations and stock valuations were high. The results so far from the major players in artificial intelligence have been lukewarm at best, raising concerns that the returns from billions of dollars invested in AI may not materialize any time soon. Amazon.com, Microsoft and Alphabet all disappointed because their forecasts either fell short of expectations or were not sufficiently specific.

“The risk is that companies might get a little nervous about the lack of revenue growth and might scale back their AI projects (or) spending,” said Bloomberg Intelligence strategist Michael Casper. “Particularly when the economy is weak and they need to keep their margins high, AI spending is the first thing to be scaled back because it generates little revenue.”

Facebook’s parent company Meta bucked the trend, citing the strength of AI as its second-quarter revenue beat expectations. Apple also said new AI features will drive iPhone upgrades in the coming months and help the company emerge from a revenue slump. Nvidia, the biggest beneficiary of AI spending, reported on August 28.

“The focus for hyperscalers this quarter was on monetizing AI,” said Savita Subramanian, equity and quant strategist at Bank of America. “Those with clear monetization trends were rewarded while others were penalized.”

In short, she said, “The days of AI hype are over. Now it’s a ‘show me’ story.”

Revenue losses galore

While earnings were a bright spot, revenue misses were more common this time, catching the attention of market watchers. Companies reported revenue below estimates 21 percent of the time, compared to 20 percent a year ago, according to data from Bloomberg Intelligence.

“Overall profits are beating expectations close to the long-term average, but revenues are below average,” Truist’s Lerner said. “So companies are pulling other levers, such as on the spending side, to hit their numbers.”

Outlook improves

Overall, executives expressed optimism about future earnings, with BI data for the third quarter coming in positive. In fact, the earnings forecast momentum indicator – derived in part from the ratio of increased to reduced forecasts – is expected to turn positive in the July-September period for the first time since 2021.

Data from Bank of America showed the same trend. Strategist Subramanian noted that analysts’ average estimates hold for both 2024 and 2025. “This suggests that analysts are relatively comfortable with their estimates,” she said.

Stock reactions are becoming intense

It was a volatile reporting season for stock prices. Both good and bad news triggered strong reactions on the stock markets, stronger than usual.

Data from Citi shows that the average price of the S&P 500 company reporting its second-quarter earnings moved 4.9 percent in either direction on the day of the announcement, well above the historical average of 3.3 percent. Moreover, the swings in one direction – up or down – on earnings announcement day were the largest in 12 years, the data show.

Recommended newsletter: CEO Daily provides the most important context to the news that leaders across the business world need to know. Every weekday morning, more than 125,000 readers trust CEO Daily for insights into the C-suite and its surroundings. Subscribe now.