It’s the Earnings, Stupid
Conflict with Iran. The largest global oil supply shock and volatile energy prices. Inflation still above the Fed’s target. Long-term interest rates rising steadily throughout the year.
Yet the S&P 500 is at an all-time high. How?
As James Carville might respond, “It’s the earnings, stupid.”
By now, most S&P 500 companies have reported second-quarter results. Recent data from FactSet show a blended (which combines results for companies that have already reported and estimates for companies that haven’t yet) annual earnings growth rate of about 50%. Alphabet and Amazon.com drove a significant share of that increase from substantial gains on investments that weren’t part of their core operations. Excluding those two companies, the S&P 500’s year-over-year profit growth was still about 30%. Either way, second-quarter numbers have contributed to the strongest multi-quarter stretch since the Covid recovery. See Exhibit.
Exhibit: S&P 500 Quarterly Earnings Growth
Source: FactSet, Wall Street Journal, Clayton Wealth Partners.
What stands out most to us is how broad-based earnings growth was. Of the S&P 500’s eleven major industry groups, 10 churned out higher profit. Only health care was down, largely because of one company—Gilead–and its $11.2 billion in charges related to a series of acquisitions.
We also think it’s noteworthy that the S&P 500’s blended revenue growth rate was about 15% in the quarter, which is high-quality driver of profit growth that signals healthy underlying trends. Here, too, contribution was broad-based—all 11 sectors enjoyed annual top line growth.
Of course, things won’t stay this strong forever. Earnings growth will decline over time, and the S&P 500’s exceptional 10% gain in the first half of 2026 likely anticipated much of the strength in fundamentals. Still, for now, this provides further evidence of the healthy participation beyond just the Magnificent 7 large tech stocks that we discussed last month.
Bullish
- Consumer spending remains resilient
- Corporate profits are increasing
- Yields for fixed income and cash remain attractive
- Credit spreads remain contained
- Consumer and corporate balance sheets generally remain healthy
Bearish
- Even when hostilities in the Middle East stop for good, it’s likely that oil prices will remain higher than their pre-war baseline for the foreseeable future.
- Housing affordability remains at decades-low
- China is experiencing a growth recession and deflation fears
- Federal debt and deficits have ballooned