Quick Bites | Record US Market Highs Driven by Earnings

Quick Bite – Record US Market Highs Driven by Earnings

The V-shaped recovery in US stocks has been driven by a V-shaped recovery in corporate earnings. Last week, the S&P 500 hit 5 record highs in 5 trading days, and cementing a 28% rally since reaching this year’s Independence Day low on 8 April.

Interestingly, this V-shaped recovery in the benchmark index marks the second-fastest rebound from a drawdown of at least 19% in the last 75 years, according to data from strategist Charlie Bilello. See chart below which shows S&P 500 earnings revisions breadth (the ratio of companies raising forecasts to those cutting forecasts), and it tells an important story. This rally is not built on hot air but on earnings.

Source: Yahoo Finance

The V-shaped recovery in earnings expectations that has accompanied this rebound in the market provides rationality to this rally. Data from Morgan Stanley shows that earnings revisions breadth — or the ratio of companies raising forecasts to those cutting forecasts — has rebounded in lockstep with the S&P 500.

After collapsing as analysts assessed the impact of President Trump’s initial “Liberation Day” tariffs, earnings revisions have been soaring, and earnings this reporting season have so far backed up this optimism.

With 34% of the S&P 500 having reported results, earnings in the second quarter are on pace to grow 6.4%, up from the 5% expected on 27 June (FactSet).

Estimates for year-over-year earnings growth in the final two quarters of 2025 and for the full year 2026 have been moving higher. As of 25 July, FactSet data showed analysts expect the S&P 500 to grow earnings by 13.9% in 2026, up from the 13.8% that had been expected a month ago.

The rebound in earnings revisions helps to justify the rally to date.

“We are currently experiencing one of the strongest V-shaped recoveries in history, rivalling the COVID rebound in 2020, the last time we were so out of consensus on the market,” Morgan Stanley’s CIO said.

Yet valuations have also been on the rise: the S&P 500 is now valued at 22.4x next year’s earnings, above the 5 year (19.9x) and 10 year (18.4x) averages. So as always, caution is warranted. But the fact is that, to date, tariffs have not had the broad impact on corporate earnings and the US economy that many had feared.