The Magnificent Seven Aren’t This Market’s Only Winners
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The U.S. budget deficit has topped $1.8 trillion this year.

And will the coming earnings season confirm that the Magnificent Seven aren't all that matters for the S&P 500? If earnings growth is increasing, then that means that this market broadening that we've seen over the past few months can be backed up by fundamentals as well, which means good profits, good guidance, good revenue. Plus, can Pfizer appease its activist investor?

It's Tuesday, October 8th. I'm Tracy Hunt for The Wall Street Journal. This is the PM edition of What's News, the top headlines and business stories that move the world today.

The U.S. budget deficit topped $1.8 trillion in the latest fiscal year, driven by higher spending on interest and programs for older Americans, as the government faces a persistent gap between federal outleays and tax collections. The new data come as Republican presidential nominee Donald Trump and Democratic pick Kamala Harris are both proposing new tax and spending plans that are estimated to add trillions more to the deficit over the next decade.

The deficit in 2023 was $1.7 trillion, which looks smaller than it actually was. That's because the Supreme Court's blocking of President Biden's student debt cancellation program was counted as more than $300 billion in reduced spending. Projections show continued deficits for the foreseeable future and accumulated debt reaching record levels within a few years. That's not a crisis, economists say, but the U.S. fiscal situation is riskier now.

Activist investor Starboard Value is knocking on Pfizer's door, demanding the drugmaker make changes to improve performance. The Wall Street Journal reported over the weekend that Starboard took a $1 billion stake in Pfizer. Pfizer's stock has been down more than 30 percent over the past two years. Joining us now to discuss what could be next for Pfizer is Wall Street Journal reporter Jared Hopkins.

So, Jared, what's going on at Pfizer right now? Why is it in trouble? Pfizer's stock has been down quite a bit since 2021 when it was at a record peak of all time because of its COVID-19 vaccine that generated record returns. Since then, the stock has fallen and it has not really recovered. For 2024, the stock price has largely been steady, but

but investors have really been waiting to see some news or drug development or something that can really inspire growth.

confidence in the company. And what does Starboard want to see happen at Pfizer? So we don't really know yet at this point what Starboard wants Pfizer to do otherwise than turn its performance around. What we've reported is that Starboard has

has sought out the help of former Pfizer executives, including a former CEO, Ian Reid. As you mentioned in your article, an analyst said that the activist effort at Pfizer has some Disney vibes, alluding to Bob Iger's return to the helm at Walt Disney after his successor was ousted. What can Pfizer CEO Albert Bourla do? Albert Bourla became CEO in 2019, and he was actually sort of a handpicked CEO after

from former CEO Ian Reid. The options right now are in a way sort of limited. A lot of the low-hanging fruit, so to speak, have already been tried by the company. They've done a number of deals to bring in new drugs in development and find new sources of revenue. But the reality is that over the next few years, the company is going to face the loss of exclusivity

on some of its big selling drugs, drugs like Zelljans, drugs like Eliquis. The other sort of main event that investors are waiting on is Pfizer's weight loss drug. Pfizer wasn't successful with its first go around at it with a drug. It's got a second drug now that it's developing, but we're not going to really know a lot about safety and efficacy of that drug for sure until sometime next year.

Jared Hopkins is a reporter covering healthcare and pharmaceutical companies for the Wall Street Journal. Short-selling firm Hindenburg Research Today said in a report that the video game platform Roblox has reported inflated user metrics to investors and isn't doing enough to protect children. Hindenburg said its research is based in part on interviews it conducted with multiple former Roblox employees and first-hand experience on the platform.

A spokeswoman for Roblox said the company rejects the claims made in Hindenburg's report, saying that they are simply misleading and that the authors of the report have an agenda. The Wall Street Journal hasn't independently verified the report's allegations.

Even robots are getting less work at U.S. factories. According to the Association for Advancing Automation, a trade group for the robotics industry, orders for factory robots in North America plunged by nearly one-third last year from 2022's record volume. Manufacturers are cutting back on purchases of automation equipment as business slows on production lines and shop floors, and more human workers are lining up for work again.

But WSJ manufacturing reporter Bob Tita, speaking to our tech news briefing podcast, said that robotics demand isn't dead. It's just a slowdown in robot hiring. In manufacturing, demand rises and falls. And at the moment, demand isn't there. Demand for robots will come back when demand for robots is low.

Demand for higher production is there and probably lower interest rates as well. That makes them easier to finance. Automation is here to stay. It's just slowing down a little bit. And you can hear more about what's driving this drop in automation in American manufacturing in tomorrow's Tech News Briefing podcast.

Coming up, this earnings season could offer more signs that not everything in the S&P 500 is about the Magnificent Seven. That's after the break. Your business deploys AI pilots everywhere. But are they going anywhere? Or are they stuck in silos, exhausting resources, unable to scale? Maybe you don't need hundreds of AI pilots. You need a holistic strategy.

IBM has 65,000 consultants with Gen AI expertise who can help you design, integrate, and optimize AI solutions. So you're not just deploying AI, you're scaling it across your business. Learn more at ibm.com slash consulting. IBM, let's create. A less glamorous group of stocks is stepping into the spotlight. In the first half of 2024, tech titans and their AI ambitions helped drive the S&P 500 up 19%.

But since the start of the third quarter, sectors like utilities, materials, and industrials have picked up the baton to broaden the market's rally. According to FactSet, Wall Street expects earnings for the Magnificent Seven group of tech giants to rise 17.5% in the third quarter from a year earlier, compared with a 1.1% climb in profits for the rest of the S&P 500.

That would be the smallest earnings gap between the two groups since the first quarter of 2023. And as we enter the earnings season for the third quarter, our reporter Hardika Singh joins us now to discuss what to expect.

So Hardiko, what are investors saying? Do they expect this narrowing earnings gap to be sustainable? Yes, they do. So this very well may be the last quarter where we see Magnificent 7 group of tech stocks continue to be the outperformers in terms of earnings growth.

A lot of analysts and a lot of investors expect that this rotation will really change the game for how this market broadening is going to play out. So in the fourth quarter, a lot of people expect that the other 493 companies in the S&P 500 will finally start to play catch up. And that'll be a good thing this quarter, too, to see whether it's on track or not. The reason why they're paying so much attention to this is because

If earnings growth is increasing, then that means that this market broadening that we've seen over the past few months can be backed up by fundamentals as well, which means good profits, good guidance, good revenue.

And what about the so-called Magnificent Seven? Alphabet, Amazon, Apple, meta platforms, Microsoft, Nvidia, and Tesla. The tech rally that we've seen this year has cooled down a little bit in recent months.

Tech is still very much in the game. They're still posting earnings growth in double digits. It's just that competition is much tougher now because there's all these other non-flashy sectors also competing for the rank of the best performer in the S&P 500 this year.

And then earnings, they are quarterly. And when you have had that good of a growth last year and you compare it to this year, it's obviously not going to look as good. Whereas for these other companies, which didn't really do all that much last year, they are starting to look a little bit better.

And what trends will investors be looking for in the coming earnings reports? There's so many things to keep an eye out for. It seems like over the past few weeks, the whole game has changed a lot. We have this escalation of war in the Middle East that's playing out right now. We also have the presidential election, the outcome of which still remains very uncertain. And then we also have, you know, just how much

the impact from rate cuts is going to start showing up in corporate earnings and their bottom line. So there's so many things. And a lot of the rally is, again, dependent on how those factors play out. Haridika Singh is a markets reporter for The Wall Street Journal. Thank you. Thank you so much.

Today, anyway, tech stocks were back in business. Gains by the technology sector pushed the S&P 500 higher 1%, while all the big tech stocks in the Magnificent Seven advanced. The tech-heavy Nasdaq Composite climbed 1.4%, and the Dow added 0.3%, or about 126 points.

In other news, the Nobel Prize in Physics has been awarded to John Hopfield of Princeton University and Jeffrey Hinton of the University of Toronto today for discoveries and inventions that led to many of today's most powerful artificial intelligence models. The scientists helped train artificial neural networks that can recognize patterns in large datasets using tools from physics. Their approach helped pave the way for systems like ChatGPT.

Hinton, known as one of the godfathers of AI, worked for Google for more than a decade, but quit last year to speak more freely about the risk of AI development. And that's what's news for this Tuesday afternoon. Today's show was produced by Pierre Bien-Aimé and Anthony Bansi with supervising producer Michael Kosmitas. I'm Tracy Hunt for The Wall Street Journal. We'll be back with a new show tomorrow morning. Thanks for listening.

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