Key Takeaways:
S&P 500 second-quarter earnings rose 45 percent year over year, but roughly 19 percentage points came from unrealized investment gains at Alphabet and Amazon.
"The breadth of earnings surprises is striking, with 64 percent of companies beating consensus by at least one standard deviation," Goldman Sachs' strategy team said in its mid-season earnings report.
Excluding the non-operating gains — Alphabet booked about $98 billion in other income and Amazon about $53 billion, with Microsoft adding roughly $3 billion — S&P 500 EPS growth was 26 percent, the fastest since 2021 and above the 20 percent recorded in the first quarter. The median S&P 500 stock grew EPS 12 percent year over year, beating the 9 percent pre-season consensus. AI infrastructure companies contributed about one-third of the index's EPS growth, with the top 10 contributors — led by Alphabet at 28 percent, Amazon at 16 percent, Micron at 10 percent and Nvidia at 9 percent — accounting for 79 percent of the total.
The growth is increasingly concentrated and increasingly expensive to sustain. Alphabet, Amazon and Microsoft reported combined second-quarter capital expenditures of $182 billion against roughly $5 billion in free cash flow, funding the gap with about $51 billion in bond issuance and $50 billion in equity. Goldman now forecasts hyperscaler capex will exceed $1 trillion in 2027, up 33 percent year over year, and projects about $400 billion in investment-grade bond issuance next year.
The market's response to earnings beats has narrowed. Historically, S&P 500 companies that beat EPS estimates outperformed the index by about 95 basis points the next day; this quarter that premium fell to 39 basis points. Technology, media and telecom stocks that beat estimates underperformed the S&P 500 by an average of 192 basis points the day after reporting, while non-TMT beaters outperformed by 75 basis points.
The concentration risk is structural. The Magnificent Seven group is on track to bring in more than 29 percent of all S&P 500 earnings this year, up from 16.4 percent in 2020, and accounts for 32.7 percent of the index's market capitalization. Analysts have revised 2027 S&P 500 EPS estimates up about 1 percent since the start of the third quarter, with energy and financials seeing the largest upward moves.
Cost pressures remain the key risk to margins. Consensus estimates for third-quarter profit margins have been revised down across most sectors, with consumer staples cut the most at 53 basis points. The high margins of large technology companies support the index's weighted average but have not translated to most individual stocks.
The earnings season confirms AI demand is converting into cloud revenue — combined hyperscaler cloud growth accelerated to 48 percent from 39 percent in the first quarter — but the financing gap between capex and free cash flow is widening. Investors will watch Nvidia's August 26 report for the clearest signal on whether the AI infrastructure cycle can sustain the current earnings trajectory.
This article is for informational purposes only and does not constitute investment advice.
