Wall Street loves an earnings beat, but tech stocks and the Magnificent Seven are barely clearing the bar this season.
That's according to an analysis of earnings data by Wells Fargo chief equity strategist Ohsung Kwon and his colleagues. Through Oct. 30, the companies that have reported third-quarter earnings per share have beaten expectations by 3% on average.
Excluding the Magnificent Seven stocks and the S&P 500 technology sector, earnings have beaten expectations by 5.1% on average. The tech and Mag 7 group has beaten expectations by just 0.3%.
That could help explain why Wall Street has soured on AI stocks and shifted to defensives in recent weeks.
Leading the earnings surprises are energy, beating expectations by 16.3% on average, and utilities and industrials, which are beating expectations by 7.4% and 7.2%, respectively, on average. Revenue surprises have been led by energy, health care, and industrials, while real estate, financials, and utilities have lagged.
"This is the last busy week of EPS, with 21% of SPX market cap reporting led by defensives: 45% of Utilities and 22% of Health Care," writes Kwon. "Following the big rotation into defensives, we now believe it's time to pick stocks within those sectors, especially in areas like Pharma, Biotech & Life Science that outperformed by 12ppt over the past month."
Since Oct. 12, the day before big banks kicked off earnings season, consumer staples, health care, materials, utilities and financials are all up 4% or more, according to Dow Jones Market Data. On the flip side, communication services, down 15.8%, and tech, down 8.1%, have been hammered.
Through last week, 160 stocks had risen in the trading session following their earnings releases, compared with 143 that had declined.
In the trading session after reporting results, industrial stocks have risen 61% of the time this season, while 53.3% of financial stocks closed higher. Tech and communication services each saw more than 60% of reporting stocks close lower, according to Dow Jones Market Data.
"Now that capital spending expectations have flatlined for CY 2026 and investors are focusing more on profitability from the AI Buildout, the AI Trade has become a 'show me' story," writes Chris Senyek of Wolfe Research. "Said differently, our sense is that the Tech trade is now beholden to technical trading factors including signs of a wash-out as investors lock in gains for the year."
Although technology and AI-related companies may have delivered smaller earnings surprises, they are still the S&P 500's growth drivers: the tech sector accounts for 52.3% of the index's estimated full-year earnings growth this year, according to Senyek. Nvidia, for example, is expected to contribute 15% of the index's earnings growth this year. Other large expected contributors are Micron Technology, Broadcom, ExxonMobil, EchoStar, and Microsoft.
Senyek thinks stocks can rally into year-end if Nvidia's earnings and Anthropic's planned IPO serve as positive catalysts and oil prices don't spike.
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