Happy Monday! We're heading into the final stretch of Q2 earnings season, and so far, the results have been more than solid. According to FactSet, 90% of S&P 500 companies have now reported. 81% of them have beaten both earnings and revenue expectations, which is far above the 10-year average of 75% and 64%, respectively. Overall, companies are delivering earnings 8.4% above estimates, higher than the 10-year average of 6.9%.
Earnings growth for Q2 stands at 11.8% year-over-year. This marks the third straight quarter of double-digit EPS growth for the S&P 500. Sectorally, consumer discretionary, communications services, and financials are taking the charge in terms of beating expectations.
The forward-looking guidance, however, shows a mixed picture: 38 companies have issued negative Q3 EPS guidance, while 40 expect positive EPS growth.
Talking about P/E, valuations are creeping above historical averages: the S&P 500's forward P/E is now 22.1, compared with a 5-year average of 19.9 and a 10-year average of 18.5. That means investors are paying up for growth, and interestingly, the growth is showing up. Tariff worries? What's that?
The Deep Dive: Three Big Takeaways From The Q2 Earnings Season
This week, we are covering three emerging themes in this earnings season:
- The market is rewarding the winners less and punishing losers more
- Big Tech continues to stay strong and
- Strong earnings are pushing indices to record levels.
Let's take a closer look…
1. The Market's Carrot & Stick: How Investors Are Rewarding (and Punishing) Earnings Surprises
The earnings reaction function is showing a curious divergence this season. Companies reporting positive EPS surprises have seen their stocks go up by an average of 0.4% in the five-day window spanning two days before, the day of, and two days after earnings. This is slightly below the 5-year average of 1.0%
Conversely, companies with negative earnings surprises are taking a much harder hit than usual: falling 5.5% over that same five-day period, more than double the 5-year average decline of 2.4%.
The key takeaway is that the market this season is less generous with its rewards and more aggressive with its punishment. One standout example is Intel (INTC). On July 24, the company reported a Q2 non-GAAP EPS of -$0.10, missing consensus estimates of $0.01. Consequently, the stock nosedived 11% between July 22 and July 28, dropping from $23.24 to $20.68.
2. Big Tech Keeps Beating the Curve
Barclays analysts recently said in plain words that Big Tech continues to defy earnings gravity. While the average company is growing EPS in the low double digits, mega-cap tech is still delivering outsized beats. There are structural reasons behind that: high-margin digital businesses, recurring revenue streams, and exposure to AI and cloud adoption.
In a recent U.S. Equity Insights note, Barclays said Big Tech is still outperforming, with earnings beating estimates by an average of 12%, EPS up 27% from a year ago, and net profit margins widening by 1.9 percentage points.
For investors, the key takeaway is that the tech narrative still has substance: in an environment where earnings misses are punished, large-cap tech is one of the few areas delivering both performance and resilience.
3. Indices at Record Levels on Positive Earnings and Rate-Cut Hopes
The rally in U.S. equities is showing no signs of slowing. On August 8, the S&P 500 closed 0.8% higher at 6,389.97, just shy of its all-time high, while the Nasdaq 100 climbed to a record 23,612.15. For the week, the S&P 500 gained 2.4% and the Nasdaq jumped 3.9%, showing a strong rebound from earlier summer weakness.
Key factors driving this rally are strong earnings sentiment and macro tailwinds, despite tariff concerns. With more than 80% of S&P 500 companies beating both EPS and revenue estimates this quarter, investor confidence has been building. The tech sector, led by mega-cap names like Apple, has been at the forefront too. Apple's robust results (quarterly diluted EPS up 12 percent year over year) and $600 billion U.S. investment plan added to the momentum. The stock went up 13.3% for the week in their biggest weekly percentage gain since 2020
Adding fuel to the rally, President Trump's nomination of Stephen Miran to the Federal Reserve has sparked speculation of future interest rate cuts, giving another boost to growth stocks.
Before we sign-off
Earnings season is defined by beats and misses, and this one is no different. While headlines can be overwhelming, it pays to focus on the fundamentals and cut through the chaos: in the long term, the performance of the market reflects corporate earnings. In the short term, however, sentiment plays a crucial role.
At AlphaPro, we believe that the earnings numbers should be interpreted with the Earnings Sentiment Score, as it captures not just the results, but how executives talk about them. The AlphaPro Earnings Sentiment Score reflects their tone, their guidance, and the language they use during earnings calls, giving you a deeper read on what actually lies ahead.
Same time next week? See you then.
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