A solid earnings season shows Corporate America’s profit engine is humming along, potentially easing worries that the record-setting rally in US stocks is starting to overheat.
With about a third of S&P 500 Index members reporting by Thursday’s close, this earnings cycle is turning out to be much more robust than expected. Around 83% of companies have exceeded analysts’ profit estimates, according to data compiled by Bloomberg Intelligence. That’s on track for the highest share of beats since the second quarter of 2021.
The S&P 500 is up 28% since hitting a low on April 8, setting a series of record highs over the past few weeks. Even a version of the US benchmark that weights all members equally, rather than by market value, has notched a record. Those advances have come as fears about the impact of tariffs on the economy ebbed and investors slowly returned to stocks, abandoning an extreme aversion to risk.
For the gains to persist, corporate earnings will need to keep impressing investors, and Mark Hackett at Nationwide says the earnings season is pointing in that direction.
“As some of the pessimistic scenarios are fading, management commentary is less conservative and estimates for 2025 and 2026 are beginning to increase, which provides that tailwind,” said the firm’s chief market strategist.
Several major companies have been upbeat. Alphabet Inc. saw demand for artificial intelligence products boosting quarterly sales. Homebuilders D.R. Horton Inc. and PulteGroup Inc. reported better-than-expected earnings, sparking a relief rally in the stocks. Netflix Inc. raised its forecast for full-year sales and profit margins. And Levi Strauss & Co. said it expected sales growth to outweigh the effect of tariffs.
Most companies are topping estimates for a quarter where many analysts lowered their expectations, anticipating a weak reporting period amid heightened uncertainty about trade policy and economic growth. Before the cycle started, S&P 500 companies were expected to post a profit increase of 2.8% year-over-year in the second quarter, according to data compiled by BI. So far, overall earnings growth is 4.5%.
Meanwhile, economic data is also showing no immediate cause for alarm. Applications for US unemployment benefits fell for a sixth straight week, Labor Department data showed on Thursday, suggesting the job market is staying resilient.
“While the labor market is not firing on all cylinders, it’s not showing signs of distress either,” said Bret Kenwell, US investment analyst at EToro. That should help investors breathe easy, Kenwell said.
Still, the runway isn’t completely clear for US stocks. Equity valuations are high, with the S&P 500 trading at around 22.5 times projected earnings, compared to a 10-year average of 18.6. That’s sparked concerns that there may be little room for error. In fact, companies missing both earnings and sales estimates are being punished the hardest since the third quarter of 2022.
Moreover, signs of froth are emerging, with a manic rally in so-called meme stocks offering a reminder of 2021’s extreme investor euphoria.
“Overly bullish sentiment is still the market’s biggest risk factor,” said John Kolovos, chief technical market strategist at Macro Risk Advisors. Some Wall Street trading desks are telling clients to hedge against potential losses in case developments from the Federal Reserve or on the tariff front sour investor sentiment.
Pricey valuations are the reason why Dec Mullarkey, managing director at SLC Management, is keeping a close eye on profit beats, but an even closer one on guidance.
“Stronger-than-expected results are a support for equities, but this is an exacting market,” Mullarkey said. “Companies need to have a decent story and a strong outlook.”
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