Over the past few weeks, companies across the S&P 500 have been reporting some of the strongest earnings results we have seen in years.
Normally, Wall Street spends earnings season lowering expectations for the next quarter. Companies often try to set the bar a little lower so they have a better chance of beating estimates later.
This time, something unusual is happening.
More companies are raising their profit outlooks than lowering them, and the difference is reportedly the widest since Bloomberg Intelligence began tracking the data in 2011.
Wall Street analysts are also raising their earnings estimates for both 2026 and 2027. Usually, estimates are reduced as the year moves along. Seeing them move higher is an encouraging sign that business conditions may be stronger than many investors expected.
Companies Are Beating Expectations
Through July 22, roughly 93% of the companies that had reported earnings came in above Wall Street estimates.
For comparison, the five-year average is about 78%.
Companies are not just beating estimates by a small amount, either. According to Fundstrat, earnings have been coming in approximately 15.5% above expectations.
Overall earnings growth for the S&P 500 is currently tracking near 25%. If that holds, it would be the second quarter in a row with earnings growth above 20%.
Those are very strong numbers.
The Strength Is Spreading Beyond Big Technology
One of the biggest concerns about the stock market over the last few years has been that too much of the market’s growth depended on a small group of very large technology companies.
That may finally be changing.
The other 493 companies in the S&P 500 are now expected to produce earnings growth of approximately 23%, which would be their strongest growth since 2021.
That means the earnings recovery is beginning to spread into areas such as:
- Energy
- Industrials
- Financial companies
- Semiconductor companies
- Businesses outside the largest technology stocks
A healthier market usually has many different industries participating—not just a handful of famous companies.
So Why Isn’t the Market Rallying?
Normally, strong earnings, rising profit forecasts and improving guidance would be enough to push stocks significantly higher.
So far, that has not happened.
The S&P 500 has been trading close to where it started the summer. Even companies reporting better-than-expected earnings have not received much of a reward from investors.
Historically, a company that beats earnings expectations has gained about 1% around the time of its report. This earnings season, those companies have actually declined slightly on average.
That does not necessarily mean investors dislike the results. It may simply mean that much of the good news was already expected.
Good News May Already Be Priced In
The stock market entered earnings season with relatively high valuations.
The S&P 500 was trading at more than 20 times expected earnings, which is above both its five-year and 10-year averages.
In simple terms, investors were already paying a fairly high price for future profits.
Strong earnings help support those prices, but they may not immediately push stocks higher unless the results are even better than the market expected.
Think of it like buying a house in a very popular neighborhood. Even if the house is excellent, the price may already reflect much of what makes it attractive.
Money Is Rotating
Another reason the overall market has moved sideways is that money is shifting from one part of the market to another.
Some investors are taking profits from the large artificial intelligence and technology stocks that led the market higher. That money may be moving into energy, industrial companies, financial stocks, healthcare and smaller companies.
When this happens, the market index may not move very much, even though many individual stocks underneath the surface are performing well.
This kind of rotation can actually be healthy. It reduces the market’s dependence on a small number of companies.
Interest Rates and Oil Still Matter
Strong earnings are providing support, but investors are also paying attention to interest rates, inflation, oil prices and geopolitical risks.
Higher interest rates make bonds more competitive with stocks and can place pressure on stock valuations.
Higher oil prices can also increase inflation and raise costs for consumers and businesses.
These concerns are creating a tug-of-war between strong corporate profits and an uncertain economic environment.
What This Could Mean for Investors
The most encouraging part of this earnings season is not simply that companies are beating estimates.
The bigger story is that companies are raising their expectations, Wall Street analysts are lifting future earnings forecasts and growth is spreading beyond the largest technology stocks.
That is the kind of foundation that can support a longer-term market advance.
However, strong earnings do not guarantee that stocks will immediately move higher. Valuations are elevated, interest rates remain important and investors are still cautious.
The market may need more time to digest the good news.
My Thoughts
I believe this earnings season is fundamentally positive for the stock market.
Companies are growing profits faster than expected, future estimates are moving higher and the strength is becoming more widespread.
The market may continue to move sideways in the short term as investors rotate between sectors and wait for more clarity on interest rates, oil prices and global events.
But if earnings continue to improve, history suggests stock prices will eventually have a difficult time ignoring that strength.
As always, markets rarely move in a straight line. There will be good days, difficult days and periods when very little seems to happen.
For long-term investors, the important point is that corporate America appears to be in much better shape than many people expected.
That does not remove every risk, but it gives the market a much stronger foundation for the months ahead.
Mike Frost
Frost Financial Group
This material is for informational purposes only and is not intended as investment advice. Past performance does not guarantee future results. Investing involves risk, including the possible loss of principal.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.