Amid the challenging backdrop of high oil prices and interest rates, major U.S. corporations are projected to deliver their strongest quarterly earnings growth in five years. The surge has been spearheaded by Big Tech companies capitalizing on artificial intelligence (AI) investments and energy firms, with the earnings recovery now showing signs of broadening into other sectors like financials and defense.
According to financial data provider FactSet, as of July 31, 61% of S&P 500 constituents had reported second-quarter (April-June) results. The blended earnings per share (EPS), which combines reported results with consensus estimates for remaining companies, is expected to have increased 47.4% compared to the same period last year. This marks the highest growth rate since the second quarter of 2021 (91.6%).
Among the companies that have reported, 86% posted EPS that exceeded market expectations. If this rate holds through the end of the reporting season, it would significantly surpass the five-year average of 78% and the ten-year average of 76%.
The robust earnings performance is particularly noteworthy given the difficult operating environment. During the second quarter, U.S. gasoline prices exceeded $4 per gallon, fueling inflation concerns, while a global bond market sell-off pushed real interest rates higher, worsening financing conditions for corporations. Although consumer sentiment was significantly dampened, corporate profits displayed unexpected strength.
The earnings improvement was led by Big Tech firms benefiting from expanded AI investment and the energy sector, which saw a direct boost from rising international oil prices. With U.S. consumption proving more resilient than anticipated, other sectors such as financials and defense also delivered solid results.
FactSet noted that even excluding Alphabet and Amazon—which reported adjusted net income two to three times higher than market forecasts due to a surge in the valuation of the privately held AI firm Anthropic—the adjusted net income of reporting companies still beat market expectations by an average of 9.2%. However, the contribution of these two giants is so substantial that removing them causes the S&P 500's blended EPS growth rate to plummet from 47.4% to 28.8%, underscoring how heavily this quarter's strength is concentrated in a few Big Tech names.
The degree to which this strong performance is concentrated in a handful of large-cap tech stocks becomes even clearer when comparing figures calculated separately by FactSet and Goldman Sachs. Both institutions show a common pattern of a sharp drop in the growth rate once Alphabet and Amazon are stripped out.
▲ 21Q2Peak = Recorded figure for Q2 2021, Blended = FactSet's aggregate blended figure, FS ex-AA = FactSet growth rate excluding Alphabet and Amazon, GS Total = Goldman Sachs headline growth rate, GS Adj = Goldman Sachs growth rate excluding one-time equity method valuation gains. (Source: FactSet, Goldman Sachs)
Goldman Sachs offered a similar analysis. John Flood, a partner at Goldman Sachs, assessed that the S&P 500's second-quarter EPS significantly exceeded market expectations. According to Goldman Sachs data, Q2 EPS growth reached 45%, far surpassing the consensus estimate of 22% at the start of the quarter. Even excluding approximately $151 billion in equity method valuation gains from Alphabet and Amazon, the growth rate reached 26%, marking the fastest pace of increase since 2021.
"As market positioning clears out, the S&P 500 could retest its all-time high this year," Flood projected. Indicators reflecting market participants' investment sentiment are indeed moving out of overbought territory. Goldman Sachs' Sentiment and Positioning Indicator has fallen to the 53rd percentile, and hedge fund leverage has decreased significantly compared to the start of the year. He also cited the fact that the benefits of the AI super-cycle have not yet been fully priced in as a basis for further upside.
"The most important change is that the earnings improvement, which was confined to the tech and energy sectors, is now spreading across the broader market," Richard Saldanha, an equity portfolio manager at Aviva Investors, told the Financial Times. "The broadening base of earnings improvement is a crucial signal for gauging future stock market trends."
Meanwhile, there are suggestions that this strong corporate earnings performance could lead to political controversy. Critics point out that while the real income of middle and lower-income households is declining due to the burden of high oil prices, corporations and stock market investors are reaping significant benefits, potentially fueling discontent over wealth inequality.
U.S. stock markets indeed showed strong momentum. On July 31 (local time), the Dow Jones Industrial Average closed up 0.53% at 52,485.03, the Nasdaq Composite rose 1% to 25,373.85, and the S&P 500 gained 0.7% to 7,489.72. Amazon's stock price surged 15.32% after its second-quarter cloud revenue beat market forecasts and the company raised its annual capital expenditure outlook. Alphabet also rallied, gaining 6.73%. In contrast, Apple plunged 7.35% after issuing a weaker-than-expected earnings outlook and warning of supply chain disruptions.
The core Q2 trends and stock price reactions for the three companies are summarized below.
Turning to the South Korean stock market, a similar trend is detectable. Kakao Pay, a leading domestic fintech company, announced on the same day (the 4th) that its preliminary second-quarter results showed both revenue and operating profit reached all-time quarterly highs. While all business segments—payments, financial services, and platform—continued double-digit growth, the proportion of revenue from financial services surpassed half of the total for the first time. This signals a clear transition from a payment company to a comprehensive financial platform. Its subsidiary, Kakao Pay Securities, also sustained high growth, with assets under custody surging 279% year-over-year.
Both domestically and internationally, this second-quarter earnings season is translating into better-than-expected surprises at the individual company level.
However, the potential for further tightening by the U.S. Federal Reserve remains a source of market anxiety. At the July Federal Open Market Committee (FOMC) meeting, three members dissented, arguing for a rate hike, and the market is now pricing in a 65% probability of a rate increase in September. Additionally, the ongoing bond market weakness, with the 10-year Treasury yield surpassing 4.7%, is acting as a headwind capping stock market gains.
Experts note that while corporate earnings are the market's strongest pillar of support, macro variables such as interest rates and oil prices could amplify stock market volatility. "If the 10-year Treasury yield approaches 5%, it will act as a burden on the market," said Terry Sandven, a strategist at U.S. Bank Wealth Management. "The current market is a situation where opportunity and anxiety coexist."
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