SECOND QUARTER EARNINGS
The U.S.-Iran war seemingly erupted again this week, but the market ultimately shrugged it off. The S&P 500 rose to end just short of a record high on Friday, as a blockbuster Nasdaq debut of South Korea’s SK Hynix fueled optimism about memory-chip makers, while investors looked ahead to quarterly earnings season kicking off this coming week.
The artificial intelligence trade returned to the spotlight after SK Hynix ended 13% above its offering price at $170 in a high-profile U.S. listing. The semiconductor company raised over $26 billion on Thursday by selling American Depositary Receipts priced at $149 each.
Chipmakers have been among the biggest beneficiaries of this year’s AI-driven rally, fueled by expectations of heavy spending by hyperscalers. But concerns over stretched valuations and profit taking have recently injected volatility into the sector.
Thanks to increased corporate profit estimates, the S&P 500 is trading at about 20 times expected earnings, down from an earnings multiple of 21 in late May, even though the benchmark is trading near record highs.
Reports from big U.S. banks will kick off the second-quarter earnings season next week. Analysts are expecting S&P 500 earnings to surge 24% from a year earlier, with technology companies driving much of the growth, according to LSEG I/B/E/S.
“This is a high-bar quarter with a narrow margin of error,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis, Minnesota. “The banks will give us a good read on the underlying economic strength and what consumers and businesses are doing.” (More on that below).
For the week, the Dow lost -0.5% to 52,637, the S&P 500 added +1.2% to 7,575, the Nasdaq gained +1.7% to 26,282 and the Russell 2000 slid by -0.6% to 2,978. The CBOE Volatility Index closed lower by -4.9% to 15.03.
LET’S SEE THOSE RESULTS
Second-quarter earnings season begins this week. As usual, the big banks will kick off earnings season, with the first reports on Tuesday.
So, what should we expect? After all, share prices ultimately follow earnings. Many factors can move stocks in the short term (wars, oil price spikes, unexpected economic data, or policy moves by the Federal Reserve are a few). But if you want to get a sense of where the stock market is heading in the medium and long term, watching earnings is a great start.
Optimism is flowing. Right now, analysts estimate that S&P 500 companies’ earnings in Q2 will rise 23.3% from the same quarter last year. It that estimate proves correct, it would be the second consecutive quarter of earnings growth above 20%.
That’s huge! The five-year average earnings growth rate is 16.4% and the 10-year average is 10.3%. And the long-term average growth rate is below 10%.
Analysts have been raising their expectations for Q2 earnings over the last few months:
As can be seen in the chart above, on March 31st the estimated growth rate for the S&P 500 was just shy of 19%. The increase in analysts’ growth estimates for the S&P 500 is due to the 111 companies in the index that issued Q2 earnings guidance: 63 reported positive guidance, i.e., they said their earnings will exceed current Wall Street expectations. That’s a larger number than the 48 companies that said their earnings will underperform Wall Street’s expectations. Notably, 44 companies in the information technology sector issued positive guidance.
For the full year 2026, analysts expect S&P 500 earnings to increase by 18.9%.Remember – the stock market prices stocks based on future earnings, usually the next 52 weeks, and the most recent quarterly performance provides a good indication of what those future earnings might be. And right now, expectations are very high.
An AI Top? Not so Fast!
That didn’t last very long! Speculation about whether the stock market had hit peak AI has bitten the dust. Fears over rising borrowing costs and excess computing capacity have been blown away by a barrage of spending news. We can expect a volatile earnings season ahead.
Escalation in the U.S.-Iran conflict this week has lifted bets on interest-rate hikes. That, in turn, raised the question of whether higher borrowing costs might lead one of the Big Tech companies to scale back investment—with eyes on social-media company Meta Platforms, a relative laggard in advanced artificial-intelligence models.
That explains the big market reaction to a report Meta wants to double its computing capacity to 14 gigawatts next year, according to a Reuters report Thursday. A typical one-gigawatt AI data center requires $38 billion in up-front capital expenditure according to analysis firm Epoch AI—so Meta’s reported plan would imply roughly $266 billion in capex.
Whether Meta shareholders want to fund that kind of spending remains to be seen, especially with all the Chinese competition undercutting the price for Western AI. Watch out for a big capex increase in Meta’s earnings report, expected later this month. But this is certainly good news for hardware companies like memory-chip makers Micron and SK Hynix. Micron just pledged $250 billion in U.S. investment and we discussed what SK Hynix did above.
Economic Reports of Note (All Times EST):
Monday
6:00 am – US: OPEC Meeting
11:30 am – US: 3 & 6-month Bill Auctions
12:30 pm – US: Fed Member Waller Speaks
2:00 pm – US: Federal Budget Balance
Tuesday
6:00 am – US: NFIB Small Business Optimism
8:15 am – US: ADP Employment Change Weekly
8:30 am – US: CPI
8:30 am – US: Real Earnings
8:55 am – US: Redbook
11:00 am – US: Cleveland CPI
12:40 pm – US: Fed Vice Chair Barr Speaks
1:00 pm – US: Fed Member Goolsbee Speaks
1:30 pm – US: Fed Governor Cook Speaks
2:55 pm – US: FOMC Member Bowman Speaks
Wednesday
7:00 am – US: Mortgage Data
8:30 am – US: PPI
8:30 am – US: NY Empire State Manufacturing Index
8:45 am – US: FOMC Member Williams Speaks
9:45 am – CAN: Bank of Canada Interest Rate Decision
10:30 am – US: Crude Oil Inventories
11:00 pm – US: Fed Governor Cook Speaks
2:00 pm – US: Beige Book
Thursday
2:00 am – UK: GDP
8:30 am – US: Retail Sales
8:30 am – US: Philadelhia Fed Manufacturing Index
8:30 am – US: Weekly Jobless Claims
10:00 am – US: Pending Home Sales
10:00 am – US: Business Inventories
11:30 am – US: 4 & 8-week Bill Auctions
11:30 am – US: Atlanta Fed GDPNow
12:30 pm – US: Fed Member Logan Speaks
Friday
5:00 am – EU: CPI
8:30 am – US: Import/Export Price Index
8:30 am – US: Building Permits & Housing Starts
9:15 am – US: Industrial & Manufacturing Production
9:15 am – US: Capacity Utilization Rate
10:00 am – US: Michigan Consumer Sentiment
10:00 am – US: Michigan Inflation Expectations
10:45 am – US: Atlanta Fed GDPNow
