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It’s that time of the year again: Earnings Season. Corporate America turns in quarterly report cards for investors to review and measure company fundamentals. It’s a refreshing time in many ways for investors. It allows us to focus on facts rather than rhetoric and emotion. Like many Earnings Seasons of late, this one comes with the Stock Market near all-time highs. That generally means that expectations are pretty built in. They’re expected to be good.
The Street is estimating S&P 500 earnings to grow 23.6% in Q2. If reached, this would be the highest since the 32% growth seen in Q4 of 2021. That was back in the early recovery from Covid. Of course, when expectations are high, companies generally need to beat those estimates to prevent a sell-off. Artificial Intelligence continues to be the dominant theme. AI infrastructure stocks are expected to contribute nearly 60% of the total earnings growth in Q2 for the S&P. The solid economic environment, higher Oil prices and the weaker Dollar also contribute to the results.
If you want to understand why the Stock Market is up in 2026, despite all the political and geopolitical issues surrounding, it starts and ends with earnings. They have risen all year. Back in January, the Street was modeling S&P earnings growth at 13.6% for 2026. Those estimates have doubled since. The Street now expects the S&P to earn roughly $340 this year, marking a 26.4% increase from last year, should those numbers get hit. And how about this: Just 3 companies – Google, Meta and Amazon – alone account for over 70% of the increase. The Semiconductors are the largest driver of growth, surging 130% compared to last year and accounting for a whopping 40% of the total.
The AI revolution is in full speed, and their stocks have been too. However, the AI trade hit a brick wall in July, sending semiconductors southward. But companies keep spending. A Morgan Stanley report indicated that rising energy costs and future capacity needs led it to raise capex estimate for the Tech Titans. The bank now expects AI spending to eclipse $1 Trillion this year, $1.2 Trillion next year and $1.4 Trillion in 2028. That could keep the bid under the Stock Market a little longer, should it pan out. That said, Morgan Stanley did acknowledge that bottlenecks have pushed start to finish timelines on data centers to as much as 3 years. What’s more, the growing pushback from communities from coast-to-coast about data center development and political uncertainties are triggering companies and utilities to move even faster, while they still can. This issue between Silicon Valley, Wall Street and Main Street is just getting started and it will no doubt be an issue in the November elections. The Market is paying attention closely.
Earnings Season always starts off with the Big Banks. They didn’t disappoint. Citi recorded its best quarterly revenue in a decade. Bank of America reported double-digit profit growth in every business segment. CEO Brian Moynihan said it was one of the best quarters on record for the bank. J.P. Morgan reported record revenue in all of its major business lines. CEO Jamie Dimon said this environment is “as good as it gets”. Wall Street trading desks have been active with record volume as investors engaged the rally. Also in the quarter was the SpaceX IPO. The white-hot deal was a boon for Wall Street bankers. IPO underwriting revenues doubled compared to last year. M&A saw a 72% increase, marking all-time records for deal-making. Records were also reached in stock and commodity trading. A solid Job Market and record Stock Market have certainly driven the Consumer spending. Credit card balances grew while delinquencies fell. That’s music to the ears on Wall Street.
The K-shaped Economy is definitely not working for every American. There is a clear distinction between investors that own assets and those that live paycheck to paycheck. Prices remain high. Incomes are struggling to keep up. But there was some reprieve. Inflation actually stalled in June. Prices stopped going up. The Consumer Price Index (CPI) was flat month-over-month for the first time in 2 years. That said, prices are still 3.5% higher than last year. That’s nowhere near the Fed’s 2% target, but it’s a start. To be clear, prices are still nearly 30% higher than pre-Covid levels. It’s the rate of those prices continuing to inflate that is slowing. There’s one problem: It might not last. Oil prices are back up in July.
Retail sales in June were the weakest in 5 months. It followed a strong report for May. Retail and food services sales rose just 0.2%. That followed the 1.0% jump in May. But the soft number is almost entirely a gasoline story. Sales at gas stations across the country fell 5.3%. That was the sharpest drop since 2022. The price at the pump fell roughly 50 cents a gallon. If you strip fuel out, remaining sales rose 0.7%. The situation was better than it appeared. Cheaper gas means more money to spend on discretionary purchases. Consumer Spending accounts for 70% of GDP. America’s Economy runs on that.
Digging a little further, non-store retailers jumped 1.9% in June. That was the biggest gain in a year. The big driver was Amazon’s Prime Day. It came early. Prime Day historically takes place in July. Spending was greater than last year. The World Cup helped here, too, as demand for jerseys and other team apparel was strong.
The clear weakness in retail sales was concentrated in staple items. Besides gasoline, other areas that saw shrinkage was in health and personal care, which fell 0.8%, grocery stores with a 0.4% decline, and both clothing and miscellaneous retailers fell 0.3% in June. The takeaway is a bit mixed, depending on your perspective. Some analysts point to resilient, broad-based demand, while others increasingly see a more cautious, value-seeking consumer.
The June CPI report is encouraging. The combination of pleasant surprises from both labor & inflation for the first time this year was definitely well received by the Market. Our economic sources lead us to believe it will continue. That would be very Bullish for equities and Market breadth. It would also prevent more rate hikes. Inflation has a tight grip on the Fed’s reaction function presently. CPI indicates the rate of inflation has cooled. It’s our sense that the Fed is on hold, with no hikes and no cuts for the rest of the year. We think the Market likes that setup for the Fall.
One company that did not have a good week was IBM. The company preannounced a surprising earnings miss. That was a shock to the system. Big Blue had its worst single-day decline ever. How long is ever? Well, IBM was founded in 1911 and went public in 1915, when it was known as the Computing-Tabulating-Recording Company before changing its name in 1924. It’s a long and storied history for this American company which has reinvented itself time and again.
IBM’s stock was already up big on the year with a monster move in the Spring. It plunged back to the level it was in May. Big Blue took the elevator both up and down. The move had a huge impact on the Dow, less so on the S&P. It’s rare to see volatility like that in such a mature company. It shows how disruptive this AI revolution is. There seem to be clear winners and clear losers, with everyone else falling somewhere in between. But the big takeaway from IBM’s pre-release is demand is much stronger for hardware than software now and AI has already materially eaten into the consulting business. That’s a threat to many high-paying jobs. The company will present the results in greater detail next week at its scheduled date. The Market will be paying close attention.
A company in the heart of the AI revolution is Taiwan Semiconductor. It manufactures over 80% of advanced chips driving the innovation. Taiwan Semi also reported earnings this week. It was a gusher. Earnings growth soared 77% in another record quarter, driven by insatiable demand for AI chips. That was well ahead of the 59% growth estimates. The company raised its guidance for the rest of the year. The beat and raise were not enough. The bar for AI stocks got so high this Earnings Season that even the strongest reports couldn’t keep the rally going. Semiconductor stocks have fallen, as a basket, nearly 20% in July. Of course, this comes after a meteoric run. Stocks don’t go up forever. Back and filling are normal and healthy activity. Corrections do just that.
United Airlines reported a solid quarter, continuing to see strong demand for travel. The airline reported higher revenue for premium, corporate, and basic economy tickets. Demand was strong for both domestic and international trips. United did lower its outlook for Q3, citing higher fuel costs as a headwind which ultimately gets passed onto passengers. CEO Scott Kirby emphasized the solid environment they’re operating in. “We have a strong Economy, probably better than people appreciate, because we’re a pretty good real-time indicator.” This followed Delta’s strong report, which highlighted a boost in travel from the World Cup. America’s economic engine is still humming.
The cause of those higher fuel prices is tied to the military activity in the Middle East. The ceasefire is over. Missile launches resumed in Iran as the Memorandum of Understanding was violated. That shouldn’t come as a surprise. The deal seemed destined to fail from the get-go. Geopolitics has not derailed the Market’s move to record highs. The S&P has been trading around the 7,500 level for 2 months. It headed into the weekend just 2% off its all-time high set in June.
News that China is making serious inroads in AI accelerated the Tech sell-off Friday. The Chinese are fiercely competing with Silicon Valley with the goal of becoming the global leader in Artificial Intelligence, with the rest of the world operating on their platform, not that of the U.S. It’s still very early days. The implications are many. A similar wake-up call occurred early last year when DeepSeek announced an open sourced LLM that was competitive with Anthropic and OpenAI. That sent Tech stocks reeling as the AI trade corrected before reasserting the uptrend. The same thing could be at play today. That said, it’s an important reminder that the AI race is hyper-competitive and China is in it to win it.
The corrective price action continues. Market rotation has been fiercely active near these all-time highs. The AI trade keeps bifurcating. This time semiconductors sold off while money rotated back to the Tech Titans. Those mega-cap Tech stocks already corrected in June. Previously underperforming sectors like Financials, Consumer Staples and Health Care have been catching a bid. Energy has responded favorably to higher Oil prices. Participation has broadened. Money keeps moving from sector to sector while staying in the Market. Importantly, it’s not leaving the Market. That’s a good thing.
Corrections come in the form of price as well as time. There has been ferocious price action beneath the surface while the S&P 500 has moved sideways. It’s like a duck on a pond. Ducks are seemingly smooth and graceful gliders across the water. The birds strike a look of serenity with an effortless horizontal advancement above the surface. However, below the surface is rapid and vigorous constant kicking, with its legs turning and displacing water in volatile fashion. It’s a remarkable thing to see.
Earnings Season has just begun. The Tech Titans will come to the plate at the end of the month. It will no doubt be Market-moving. More than anything else, it’s earnings that drive stock prices. There are plenty of ducks on the pond right now. The price action of this Market probably appeals to that lovable loser Elmer Fudd. Earnings Season looks more like Duck Season. Beware, Donald and Daffy.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
