Earnings Provide Fundamental Support
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Is the war over? After a 10% decline, the SPX has already recovered back above all-time highs. And yet investors have been skeptical the entire way up. There’s still a lot of cash sitting on the sidelines.
When there is pervasive bearishness, that usually means the rally has longer to continue, not less. In this report, we discuss what’s driving the rally and how much further it could go.
Stock earnings
This earnings cycle is shaping up to be robust. With about a third of the SPX reported, 84% of companies are beating earnings estimates and 81% are beating revenue estimates (above average). The size of the beats are large, about 12% better than expectation.
For the entire SPX, Q1 earnings are on track to grow a whopping 15.1% year-over-year. Marking the 6th straight quarter of double-digit growth. Again, beating estimates that were already optimistic.
Given the concerns about higher oil prices, what were net profit margins? 13.4%, the highest in decades! Incredibly, they're expected to reach as high as 14.6% for the remainder of 2026. Data is louder than narratives.
The technology sector is leading profit margin expansion. Record demand for chips and data center equipment is giving companies the power to raise prices endlessly.
The other factor at play is AI adoption. The chart below is of non-tech companies that have mentioned specific plans to implement AI into workflows, leading to lower costs and higher margins. Earnings for this group have already started to diverge versus the rest of SPX:
Low valuations (e.g. price-to-earnings ratio) and rising earnings typically signal early innings of a bull market. You always want bull markets to be underpinned by strong earnings fundamentals. This rally has that in spades.
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