There's an elegant simplicity to one of the central tenets in gauging the health of the stock market and the companies that comprise its benchmark indexes: figuring out what's in the till at the end of the day.
Profit remains the most important measure of stock market health -- and Corporate America is raking it in.
"The greatest force behind stock markets right now is earnings, which is helping to overshadow concerns about Iran, inflation and AI [capital expenditure] spending viability," said Dennis Follmer, chief investment officer, at Montis Financial in Waltham, Mass., to Barron's. "Earnings have been an absolute freight train driving this market higher."
Collective S&P 500 profits for the three months ending in June, in fact, are on pace to rise more than 30% from last year, boosted by large tech stocks -- and are set to notch their best quarterly gains in nearly five years.
Of the more than 90% of the companies named in the benchmark that have reported so far, a stunning 76% have topped Wall Street forecasts, the best so-called beat rate in five years, while 10 of the S&P 500's 11 main sectors are on pace to record positive earnings growth from a year ago.
"AI remained the index's primary growth engine," said Bank of America's Savita Subramanian in a note. "The median AI-related stock grew 28% from last year, compared with 12% for the median non-AI stock."
That performance, paced by gains in the information technology, communications services, and consumer discretionary sectors, has pushed 2026 forecasts towards a full-year earnings gain of 33.3%, a staggering tally that equates to around $360 a share for the whole of the S&P 500.
That's a gain of more than 6% from early season forecasts and the highest full-year estimate on record.
It would also mean the S&P 500 is on pace for four consecutive quarters of 20%-plus annual earnings growth, a streak which has occurred only 10 times in the past 90 years, one of which was the post-Covid era of 2021.
"The defining characteristic of the season has not been an unusually high beat rate or an elevated percentage of companies exceeding implied moves," said Scott Rubner, head of equity strategy at Citadel Securities, in a note. "Instead, companies have consistently delivered results well above already-elevated expectations, producing one of the steepest earnings revision paths on record."
Stocks have responded in kind, with the S&P 500 posting its best week since April over the first full trading week of August, and taking the benchmark to a new closing high of 7757 points on Friday. Wall Street's end of year forecasts, meanwhile, are settling in at the 8000 point mark.
The S&P 500 has, in fact, gained around 3.5% since Google parent Alphabet opened the second-quarter earnings floodgates on July 22, with an index of the Magnificent Seven tech giants gaining 4.2%.
Yet non-tech earnings have also impressed.
In fact, data from Wells Fargo suggests that non-tech companies have topped earnings forecasts by around 10% -- more than double the rate seen in the Mag 7 and tech space -- creating the widest spread of performance, outside of the Covid era, on record.
"We believe wider participation could help make the market's advance more durable by reducing its reliance on a small group of megacap companies," said Brian Therien, senior analyst at Edward Jones.
That's been evident in the outperformance of non-tech sectors over the past three months, with health care stocks recording a massive 17.4% gain, more than triple the pace of the S&P 500 over the same period.
Financial and industrial stocks have also outperformed the benchmark over the past three months, while the late summer gains for the Mag 7 have lifted the information technology sector to a 6.2% advance in that span.
The march higher in bond yields, as well, which has taken the yield on 10-year Treasury notes to a fresh 18-month high of 4.73% in early Tuesday trading, isn't slowing the market's enthusiasm either.
Wei Li, global chief investment strategist at BlackRock Investment Institute, in a note, forecast U.S. earnings growth of 11.6% a year for the next five years, "a pace seen in only about 15% of historical five-year periods," even as the cost of capital continue to rise.
"Governments, AI hyperscalers and companies across the economy are competing ever more intensely for capital, keeping upward pressure on long-term government bond yields -- even in our AI productivity boom scenario," Li said.
Nvidia will close out the reporting season later this month, with a second-quarter update on Aug. 26 that is expected to include a bottom-line tally of $2.08 a share, nearly double last year's tally, and a staggering $91.9 billion in overall revenue.
The AI leader's outlook, meanwhile, could solidify investor's newfound faith in the broader tech story, and power markets higher into the autumn months and beyond.
"The next phase of the current cycle turns less on the AI story itself and more on which leaders convert record spending into returns and which companies (possibly not even within tech) find new ways to profit from the technology," said Anthony Saglimbene, chief market strategist at Ameriprise.
"As this year's market action has started to show, investors may already have started grading on that curve," he added.
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