The Earnings Gap Between Big Tech and Everyone Else Just Collapsed
The largest technology companies grew profits about 31% in the second quarter against 23% for the rest of the S&P 500 — an advantage that has shrunk from more than 45 points in a single quarter.
For most of the past three years, one statistic explained the American stock market: a small group of technology companies was growing earnings several times faster than the other 493 members of the S&P 500. That statistic has now nearly disappeared.
Second-quarter results put earnings growth for the largest technology names at roughly 31%, against about 23% for the rest of the index. The gap of roughly eight percentage points compares with nearly 46 points in the first quarter — an 82% narrowing in three months.
Two ways to read it
The optimistic reading is that the rest of corporate America has finally joined the party. Industrials, financials, energy and health care have all posted positive returns this year, and every sector in the index is up year to date. Broad participation is what a durable bull market looks like.
The cautious reading is that the leaders are decelerating from an extraordinary base while everyone else benefits from easy comparisons and a one-time boost from energy prices.
Nvidia is still doing the heavy lifting
Within the technology group, the concentration is severe. Nvidia accounts for roughly 65% of the group's earnings growth. Excluding it, the remaining six companies grew profits about 15% — essentially in line with the broader index.
Investors who believe they own a diversified basket of megacap technology exposure are, in earnings terms, closer to owning one company and five large, mature businesses.
The quality-of-earnings footnote
Analysts have also flagged how much of recent profit at two of the group came from mark-to-market gains on investment stakes rather than operations — a combined $53 billion in the first quarter, representing a substantial share of pre-tax income at both companies.
Those gains are real, and they are also a function of private-market valuations that the same AI boom has inflated. In a downturn, they would reverse.
What it means for the index
Narrowing earnings leadership is generally good news for the equal-weighted index and for active managers, and it removes some of the fragility that comes with extreme concentration. It also raises the bar for the market's largest stocks, which are now priced for a growth premium that the numbers are no longer delivering in the same magnitude.
