Will the Wall Street Rally Gain Momentum? 🗽 A Recap of the US Earnings Season

According to FactSet data, the Q2 earnings season confirms the very strong fundamental condition of the largest US companies. Positive surprises have been widespread across both earnings and revenues, while EPS growth has significantly exceeded expectations from before the start of the reporting season. At the same time, the S&P 500's valuation remains elevated, meaning that further gains in the index will increasingly depend on companies maintaining strong earnings growth. Strong fundamentals come at a price, although at this stage we do not consider the current valuation particularly demanding.

• With 88% of S&P 500 companies having reported results, 86% have beaten EPS expectations, while 76% have reported revenues above consensus. This shows that positive surprises are not limited to cost control but are also visible on the revenue side.
• The S&P 500's Q2 earnings growth rate currently stands at 50.4% year-over-year. If this rate is maintained through the end of the reporting season, it would mark the strongest earnings growth since Q2 2021, when it reached 91.6%.
• The scale of the improvement compared with earlier expectations is exceptionally large. As recently as June 30, the market expected earnings growth of 23.1% year-over-year, compared with 50.4% currently – more than twice the initial estimate.
• Importantly, the improvement is broad-based. All 11 S&P 500 sectors are now reporting higher earnings than expected at the end of June, driven by positive earnings surprises and upward revisions to EPS estimates.
• The S&P 500's forward P/E ratio stands at around 20x, compared with a five-year average of 19.9x and a ten-year average of 19x. The market is therefore not cheap, but given the current pace of earnings growth, the elevated valuation has much stronger fundamental support than it would if the index rally were driven primarily by multiple expansion.

Record After Record – Amazon Supports Wall Street

Corporate earnings remain a strong fundamental argument for the US equity market, although part of the impressive earnings growth reflects exceptionally strong results from the largest companies. In just one week, the S&P 500 earnings growth rate increased from 38% to 47.4% year-over-year, while eight sectors are already reporting double-digit earnings growth. Importantly, even after excluding the two largest contributors, earnings growth across the index remains very strong.

• S&P 500 earnings are currently growing by 47.4% year-over-year, up from 38% just one week earlier. If this rate is maintained, it would represent the strongest growth since Q2 2021.
• Excluding Alphabet and Amazon, S&P 500 earnings growth would decline from 47.4% to 28.8% year-over-year. This would still be a very strong result, marking a second consecutive quarter of earnings growth above 20% and a seventh consecutive quarter of double-digit growth.
• As many as eight S&P 500 sectors are reporting double-digit earnings growth. Energy (+135.3% YoY), Communication Services (+109.8%), Consumer Discretionary (+90.7%), and Information Technology (+69.4%) are leading the gains.
• Amazon was the main contributor to the improvement in aggregate earnings over the past week. The company reported EPS of $5.75 versus expectations of $1.82 and accounted for 76% of the increase in the S&P 500's aggregate earnings over this period.
• Amazon's high EPS was significantly boosted by $53.4 billion in other pre-tax income, primarily related to its investment in Anthropic. This means that part of the index's spectacular earnings growth does not directly reflect an improvement in underlying operating performance.
• Amazon is now the second-largest contributor to S&P 500 earnings growth, behind only Alphabet. Alphabet's results were also significantly supported by valuation gains on its equity investments.

Source: FactSet

A Narrow Group of Companies Lifts the Average

S&P 500 companies with greater exposure to international markets are performing significantly better this earnings season than companies focused primarily on the US market. This is particularly noteworthy given the relatively strong US dollar, which in theory should reduce the value of overseas revenues and earnings when translated into dollars. Nevertheless, the data show that the internationally exposed part of the index continues to deliver very strong growth in both earnings and revenues.

• Companies generating more than 50% of their sales outside the US are reporting earnings growth of 74.7% year-over-year, compared with 35.5% for companies generating most of their revenues domestically. The corresponding figure for the entire S&P 500 is 47.4%.
• A similar advantage can be seen in revenues. Sales among companies with greater international exposure are growing by 20.5% year-over-year, compared with 12.0% for domestically focused companies and 14.1% for the S&P 500 overall.
• So far, the strong US dollar has not translated into weaker aggregate results for globally exposed US companies. This suggests that underlying business growth has been strong enough to outweigh the potentially negative currency effect.
• However, a substantial part of this outperformance is being driven by the largest companies. Alphabet, Exxon Mobil, and Chevron rank among the top five contributors to both earnings and revenue growth within the group of companies with greater international exposure.
• Excluding Alphabet, Exxon Mobil, and Chevron, earnings growth for internationally exposed companies would fall from 74.7% to 27.5%, while revenue growth would decline from 20.5% to 16.0%.
• The data therefore point to two simultaneous trends: globally exposed S&P 500 companies remain fundamentally strong, but their exceptional earnings outperformance is heavily concentrated among a handful of major companies. The much smaller decline in revenue growth after excluding these companies suggests that sales strength is more broadly distributed than earnings growth.

US500 Chart (D1 Interval)

The S&P 500 futures contract is trading close to its all-time highs but has struggled to break above the 7,800-point level over the past several sessions. The index is currently around 10% above its 200-day exponential moving average (EMA200), while important recent price reactions indicate potential support in the 7,250–7,350-point area.

Source: xStation5