Wall Street continues to underestimate the growth of the Seven Magnificent Companies. And here’s why.

At first glance, the Magnificent Seven had a bit of a bad smell in the third quarter. But if you dig deeper, you’ll find reason to believe that Wall Street is underestimating big tech companies.

The Mag 7 — Nvidia (NVDA), Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META) and Tesla (TSLA) — reported third-quarter earnings growth of 18.4%, the group’s slowest growth rate since the first quarter of 2023, according to FactSet Research analyst John Butters.

But that number comes with a big caveat: Meta’s profits fell from the previous year after it booked a $16 billion tax charge. If we eliminate these one-time expenses, profits would actually rise by 30%. Not only is that more than twice as fast as Wall Street expected heading into earnings season, it’s also faster than the previous quarter when earnings rose 26%.

“Q3 saw a slight acceleration in Mag Seven’s earnings growth, suggesting to us that estimates over the next two quarters may be too low,” LPL Financial analysts wrote in a recent note.

Wall Street has been anticipating a slowdown in Mag 7’s growth for more than a year, but the group has continued to beat expectations, thanks in large part to artificial intelligence. Microsoft, Amazon, Meta, and Alphabet have all indicated that they expect to continue investing aggressively in AI infrastructure in the coming year.

LPL analysts expect these investments to support corporate profits “because – assuming they happen – they represent revenue for someone.” The key “one” is Nvidia, which dominates the AI ​​chip market and last month topped estimates with its sales, profit and earnings forecasts.

AI spending has been more of a liability than an asset for Mag 7 lately. Investors are concerned that tech giants are overspending — or, at best, spending ineffectively — on emerging technology that they may find difficult to monetize for some time. To many on Wall Street, building artificial intelligence looks like the dot-com bubble of the 1990s.

“Given that these hyper-expansive companies spend about 25% of revenue on capital expenditures, and that their capital expenditures are draining free cash flow, Wall Street may demand more evidence of future ROI,” LPL analysts wrote.

Wall Street is also recalibrating its expectations. As of late November, analysts expect Mag 7’s earnings growth to average 21% over the next four quarters, compared to just 15% at the end of August.

Among Mag 7 stocks, only Alphabet and Nvidia, which are up 66% and 33%, respectively, year-to-date through Monday afternoon, are higher than the S&P 500’s 16% year-to-date increase.