Analysts predict that a quarter of U.S. corporate profits this year will come from just a dozen companies. And investors are willing to pay handsomely for these profit machines.
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Only 12 shares, including Magnificent Seven members like Apple (AAPL) And Microsoft (MSFT) in addition to a few outsiders like JPMorgan Chase (JPM), will generate 25% of all profits generated by the S&P 1500 in 2023, according to an Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. However, it is interesting to note that these same companies represent even more – 30% – of the value of the S&P 1500. The S&P 1500 includes all major companies listed in the United States, including the giants of the S&P 500 as well as small and medium-sized businesses.
Seeing some stocks punch above their weight while many others, mostly smaller, valued or non-technological stocks, are left behind, this is revealing. JPMorgan Chase, for example, accounts for just 1.1% of the S&P 1500’s value, while it is on track to contribute twice as much – 2.2% – to the index’s profits this year. “There’s an interesting dichotomy in the market,” said Robert Maltbie, fund manager of Argonaut 2000 Partners.
A Look at 2023 S&P 500 Earnings and Beyond
Earnings growth in 2023 has been difficult to find, so investors seemed content to pay for these stocks with pure earnings power.
Analysts believe S&P 500 earnings will increase just 0.8% in 2023 compared to 2022, according to FactSet. This is anemic growth, historically speaking. For example, companies are expected to increase their profits by 11.7% in 2024.
Given the lack of profit growth, leading companies have made further gains this year. Take Apple for example. The gadget maker’s adjusted net profit this calendar year is expected to rise only about 5% to $99.6 billion. Yes, that’s 4.6% of the total expected profit of the entire S&P 1500. It’s also more than the contribution of any other company in the S&P 1500. But the stock is up nearly 50% in 2023 through now. SO, at its current valuation Apple represents almost 7% of the value of the S&P 1500.
Likewise, Microsoft is expected to earn $81.2 billion this calendar year. That’s 3.7% of all profits S&P 1500 companies are expected to make. And yet the stock has soared nearly 55% this year on enthusiasm for the company’s role in AI. Now, Microsoft represents 6.6% of the S&P 1500.
It’s not just about the “Magnificent Seven”
It’s tempting to think that the highly valued stocks in the Magnificent Seven S&P 500 only generate profits. But this is not the case.
Energy company Exxon Mobile (XOM) is expected to add $37.4 billion, or 1.7%, to the S&P 1500’s earnings this year. This makes him the fifth contributor. But its position in the S&P 1500 is less than 1%. Bank of America (BAC) should generate 1.3% profit. But the bank’s shares represent only 0.5% of the index value.
And all of this raises a big question for 2024: Will S&P 500 investors develop an appetite for more than just seven stocks?
A dozen S&P 1500 companies generate 25% of their profits
During calendar year 2023
| Business | Teleprinter | % of total net income 2023 | Sector | Weight in 1500 |
|---|---|---|---|---|
| Apple | (AAPL) | 4.6% | Computer science | 6.8% |
| Microsoft | (MSFT) | 3.7 | Computer science | 6.6 |
| Alphabet | (GOOGLE) | 3.3 | Communications Services | 3.4 |
| JPMorgan Chase | (JPM) | 2.2 | Financial datas | 1.1 |
| Exxon Mobile | (XOM) | 1.7 | Energy | 1.0 |
| Metaplatforms | (META) | 1.7 | Communications Services | 1.7 |
| Berkshire Hathaway | (BRKA) | 1.7 | Financial datas | 1.5 |
| Nvidia | (NVDA) | 1.4 | Computer science | 2.7 |
| Amazon.com | (AMZN) | 1.3 | Discretionary consumption | 3.1 |
| Bank of America | (BAC) | 1.3 | Financial datas | 0.5 |
| Johnson & Johnson | (JNJ) | 1.2 | Health care | 0.9 |
| Chevron | (CLC) | 1.2 | Energy | 0.6 |
