U.S. stocks face earnings test as profit growth expectations rise

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U.S. stocks face earnings test

Highlights

S&P 500 companies are expected to deliver second-quarter earnings growth of 23.4%, up sharply from the 15.2% forecast at the year's start, per LSEG IBES.
Year-forward earnings estimates for 2026 have gained 21% versus only a 9% rise in the S&P 500, compressing the index's forward P/E ratio to 20.1 from 22.2.
Technology, energy, and materials sector earnings are forecast to grow 65.5%, 115%, and 32.5% respectively, heightening investor sensitivity to any sector disappointments.

Second-quarter earnings set a higher hurdle

As reported by Reuters, S&P 500 companies are expected to post aggregate second-quarter earnings growth of 23.4% from a year ago, according to LSEG IBES, well above the 15.2% growth forecast at the start of the year. Earnings season begins next week with results from major banks including JPMorgan Chase and Goldman Sachs, alongside companies such as Netflix and Johnson & Johnson.

Analysts' estimates for 2026 have climbed after a strong first quarter, when S&P 500 earnings rose 29.4%, compared with a 14.4% gain expected at the start of April. Investors say spending on AI infrastructure, strength in semiconductor-related demand and resilient consumer spending despite energy price spikes after the Iran war are supporting the profit outlook.

The market is now weighing whether those expectations have become too optimistic. Yardeni Research says the risk is that exceptionally strong first-quarter results prompt analysts to raise estimates for the remaining three quarters too far, leaving companies with less room for error when they issue results and guidance in the coming weeks.

Valuation support comes with volatility risk

Profit expectations are rising faster than share prices this year, with the S&P 500 up 9% while year-forward earnings estimates gain 21% in 2026, according to LSEG Datastream. That trend is helping moderate valuations, with the index's forward price-to-earnings ratio at 20.1, down from 22.2 at the end of 2025.

Technology remains the biggest profit driver, with sector earnings expected to grow 65.5% in the quarter, while energy is projected to rise about 115% and materials 32.5%. Investors say those strong forecasts could make stocks more sensitive to disappointments, especially in volatile areas such as semiconductors, where solid earnings do not necessarily prevent selloffs.

For the full year, S&P 500 earnings are expected to rise 26.4% in 2026, which would mark the strongest annual profit performance since 2021, followed by another 17.9% increase in 2027. Still, investors are questioning whether tailwinds such as AI-related gains and fiscal stimulus are sustainable, a concern that is keeping earnings season central to the market's next move.

Our earlier article covered Meta’s plan to build its first Canadian data center—a 1 gigawatt facility in Alberta—as part of its accelerating AI infrastructure expansion. We noted the project’s roughly $9 billion price tag, the multi-year construction timeline and job creation, as well as investor scrutiny over soaring capital spending and local concerns about the environmental footprint of large data centers.

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