Quick Bites | US Corporate Earnings Surge Drives Markets

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Quick Bites | US Corporate Earnings Surge Drives Markets

Many people feel emotionally and mentally exhausted, with news of war in the Middle East, Trump’s unsettling tweets, rising inflation and interest rates, political infighting and a toxic social environment. But the low scores on sentiment indexes for both businesses and households in many developed countries (including Australia) are not affecting markets. The stark reality is that markets are driven primarily by earnings, and US corporate earnings are surging.

S&P 500 over last 5 years

Source: Trading Economics

Is it any surprise that US sharemarkets are reaching all-time highs? At this late stage of the Q1 earnings season, the S&P 500 continues to report very impressive results. Both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are above recent averages. In addition, the index is reporting its highest earnings growth rate since Q4 2021.

Overall, 89% of the companies in the S&P 500 have reported results for Q1 2026 to date. Of these companies, 84% have reported EPS above estimates. If 84% ends up being the number for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise since 2021. In aggregate, companies are reporting earnings that are ~18% above estimates.

Source: FactSet

The positive EPS surprises reported by 3 of the “Magnificent 7” companies (Alphabet, Amazon and Meta) have been the largest contributors to the increase in the overall earnings growth rate for the index over this period. Note, however, that a portion of these earnings are their own market valuations of unlisted investments, which has distorted results in an upward direction.

Another caveat: markets are highly concentrated, and the share of S&P 500 profits captured by the 10 largest companies has doubled since 1996, see chart below. The S&P 500 is not a diversified index like it used to be: it is dominated by a small number of extraordinarily profitable tech companies.

Source: Apollo, Torsten Slok

Nevertheless, ten of the 11 major sectors are reporting year-over-year earnings growth: 7 are reporting double-digit earnings growth, led by the IT, Communication Services, Materials, and Consumer Discretionary sectors. On the other hand, Health Care is the only sector reporting a year-over-year decline in earnings.

Source: FactSet

Industry analysts’ consensus Q1-2026 earnings forecasts for the S&P 500 companies in aggregate represent growth of 18% y/y, while their full-year estimates imply 2026 growth of 24%, well above the 12% and 13% posted in 2024 and 2025. The growth expected in 2027 is 15%.

Source: Yardeni Research

The forward 12-month P/E ratio is 21.0, which is above the 5-year average (19.9) and above the 10-year average (18.9).

An interesting view of global markets on a sector/style basis relative to long term PE valuations over 20 years:

Source: Moelis, Goldman Sachs

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