Key Takeaways:
S&P 500 companies beat earnings estimates by 29.2 percent, the largest aggregate surprise since 2008, with 86 percent topping consensus.
"I don't sense one ounce of skepticism among investors, from oil to interest rates to equities," Jack Ablin, chief investment strategist and founding partner at Cresset Capital Management, said. "The earnings reports were certainly supportive, but I'm not sure a handful of earnings reports justifies new records in the S&P."
Blended Q2 earnings growth reached 50.4 percent year-over-year, well above the 23.3 percent expected at the end of the quarter, according to FactSet. Stripping out one-time investment gains at Alphabet and Amazon, growth still comes in at 32 percent. Semiconductor earnings surged 135 percent as AI infrastructure spending translated into operating results, with technology hardware revenue up 31 percent. Net profit margins hit 16.9 percent, the highest since 2009.
The earnings strength pushed the S&P 500 to a record close of 7,736.52 on Tuesday, up 1.79 percent, while the Dow rose 1.71 percent to 54,085.88. The index trades at 20 times forward earnings, above its 10-year average of 19. Investors now watch Wednesday's CPI report, where core inflation is expected to moderate to 2.5 percent, and NVIDIA's Aug. 26 report as the next events to watch.
The earnings beat was broad-based. Of the 304 companies in the S&P 500 that had reported second-quarter results as of Friday, 85.2 percent beat estimates versus the long-term average of 67.5 percent, according to LSEG data. Every major S&P sector showed profit growth.
The headline numbers are flattered by accounting gains. Alphabet reported $9.11 of Q2 EPS versus a $2.88 consensus estimate, while Amazon reported $5.75 versus $1.82. Both companies booked large unrealized gains on equity investments, including SpaceX and Anthropic. FactSet calculates that removing the two companies would reduce the earnings surprise from 29.2 percent to 10.9 percent — still comfortably above the five-year average of 7 percent.
AI demand is showing up in real operating results. Amazon's AWS revenue increased 37 percent in Q2 to $42.2 billion, with operating income up 63 percent to $16.6 billion. Caterpillar, a bellwether for the global industrial economy, jumped 5.6 percent after raising its annual revenue forecast as AI data center buildout fueled demand for power-generation equipment. Palantir soared 29.5 percent after raising its annual revenue forecast.
The Magnificent 7 rose 4.7 percent last week, leading the S&P 500's 3.6 percent gain to an all-time high. Small caps underperformed but still rose 3.5 percent.
The record earnings surprise shows that AI infrastructure spending is translating into broad-based profit growth across the index. Investors will watch NVIDIA's Aug. 26 earnings and Wednesday's CPI report to gauge whether the momentum can hold at current valuations.
This article is for informational purposes only and does not constitute investment advice.
