Despite the various headwinds, the market has been remarkably resilient since the April lows. 2025 has logged its fair share of new highs amid a familiar cast of characters driving the story. The Magnificent Seven stocks now make up close to one-third of the entire index and have generated over a quarter of the S&P 500’s total profits.
Even with stretched valuations, leadership has remained remarkably consistent. The question is simple: can it last as the macro picture begins to shift?
With Nvidia yet to report, this earnings season is another reminder that the Magnificent Seven still have significant sway over the broader market. Together they posted another quarter of double-digit revenue growth, with cloud computing and AI as primary catalysts.
Microsoft, Alphabet, and Amazon all reported re-accelerating cloud growth. Azure climbed roughly 40%, Google Cloud gained 34%, and AWS grew 20% as enterprise demand for AI infrastructure keeps rising. Investors rewarded Alphabet and Amazon for balancing investment and profitability, while Meta’s stock sold off after signaling another ramp in infrastructure spending.
Capital expenditure is exploding, growing much faster than revenue. Combined estimated capex for the group jumped more than 70% over the past year. This blistering rate is likely to weigh on free cash flow going forward. Despite boasting a massive estimated free cash flow of ~$500 billion, the Magnificent Seven saw estimated free cash flow decline year-over-year by 2.8%.
That pace raises fair questions. Investors are starting to wonder whether this next wave of AI spending will produce proportional returns, or if the race to build capacity has run ahead of realized demand.
It’s an important distinction. When growth slows and hiring cools, these investments could lean more heavily on debt markets. In that scenario, rate cuts become less of a tailwind and more of a safety net, helping to offset rising funding costs and sustain liquidity for the next phase of the AI buildout.
The Federal Reserve has shifted toward easing at recent meetings, with futures pricing several cuts in 2026. Inflation continues to move in the right direction, but employment data (before the government shutdown) has not improved. The coming moves are more about stability than stimulus.
So far, a softening labor market has not deterred the market. The S&P 500 has maintained its strong momentum since coming off the early April tariff price lows, and more recently registered 26 all-time highs over the past three months. In our view, this type of price action is difficult to fade, and even harder to fight when viewed through a historical lens. Since 1950, similar clusters of S&P 500 all-time highs have preceded an average return of +9.5% over the next year (compared to an average return of 7.4%).
Here’s the basic framework right now:
In our view, the big forces driving markets remain in investor’s favor through year end.
That said, it’s fair to admit the setup is demanding. After a scorching seven-month run, risk-reward isn’t what it was, and certain pockets of the market are being rerated. The persistent underperformance from the Restaurant stocks since April has begun to stress investors due to its potential signaling of a weakening consumer. After lagging the broader equity market for years, Health care stocks are starting to show some subtle signs of life, hinting at some defensive positioning
Despite emerging blemishes and some recent downside price action, this usually isn’t the season for getting too cute. Corporate buybacks windows are reopening, which has been a key driver of shareholder return over the past decade. Meanwhile, the data indicates that S&P 500 is entering an exceptionally strong seasonal period, with November and December being two of the strongest months of the year historically.
The bottom line? The fundamentals are evolving with earnings season progressing. As of November 6, the S&P 500 blended estimated growth rate for earnings and revenue is 16.8% and 8.1%, respectively (LSEG I/B/E/S). Presently, the market is correcting in the context of an uptrend, with liquidity, positioning, and leadership seemingly supportive for now.
Glossary:
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
Net income represents what remains from a company's total revenues after deducting all operating costs, taxes, interest, and other expenses. Serving as a critical metric, net income provides investors with a clearer picture of a company's profitability, making it a key performance indicator on a company's income statement.
Free cash flow (FCF) is the amount of cash that a company has left after accounting for spending on operations and capital asset maintenance. Investors and analysts rely on it as one measurement of a company's profitability. Unlike other measures that are used to analyze cash flow in a company, such as earnings or net income, free cash flow excludes the non-cash expenses of the company's income statement. It also includes expenditures on equipment and non-capital assets, as well as changes in working capital reflected on the balance sheet.
Capital expenditures (CapEx) are the funds companies allocate to acquire, upgrade, and maintain essential physical assets like property, technology, or equipment, crucial for expanding operational capacity and securing long-term economic benefits. By investing in fixed assets, such as building a new factory or upgrading technology, companies aim to enhance their operations, ensuring sustained growth and competitive advantage. CapEx decisions reflect strategic intent, positioning businesses to leverage new opportunities and optimize their physical infrastructure.
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