S&P 500 second-quarter earnings beat expectations, with improving prospects after AI trading volatility

Overview

This issue of US Weekly Kickstart focuses on a mid-season update of the S&P 500 second-quarter earnings season. The report notes that although AI-related stocks and the Momentum factor have recently experienced sharp volatility, the performance is consistent with historical consolidation patterns following strong momentum rallies; as hedge funds and ETF investors deleverage, rotation volatility may decline over the coming weeks. Meanwhile, second-quarter results indicate that the earnings foundation underlying the US equity bull market remains solid.

Core views

The core views are as follows: First, S&P 500 second-quarter earnings growth was significantly better than the consensus at the start of the season, and earnings growth for the median company also exceeded expectations, indicating that the result was not driven solely by a few mega-cap companies. Second, earnings releases have driven broad upward revisions to 2027 earnings expectations; revisions were strongest in the Energy and Financials sectors, and revisions were positive in most industries. Third, AI infrastructure remains an important contributor to earnings growth, but hyperscaler capital expenditures will continue to exceed operating cash flow, increasing the importance of external financing and credit spreads. Fourth, TMT stocks have received weak price rewards after earnings beats, reflecting investors' higher demands regarding valuations and returns on AI investment.

Analysis framework

The report uses earnings-season tracking, EPS surprise frequency, decomposition of earnings growth, breadth of earnings estimate revisions, changes in industry margins, decomposition of AI infrastructure contributions, and analysis of hyperscaler capital expenditures and cash flow to assess the quality of S&P 500 earnings, market reactions, and subsequent risks.

Methodology notes

• Earnings analysisEPS beats and standard-deviation surprises

  Measures earnings quality based on whether a company's EPS exceeds consensus expectations and by how many estimate standard deviations.

  The report emphasizes that 64% of S&P 500 companies that had reported exceeded consensus EPS expectations by at least one estimate standard deviation, indicating that the magnitude of surprises this earnings season is at a historically high level.

• Estimate revisionsEarnings revision breadth

  Measures the diffusion of revisions by subtracting the number of companies with negative revisions from the number with positive revisions and dividing by the total number of companies.

  The report states that 2027 EPS expectations have been raised by 1% since the third quarter began, with positive revisions across most sectors, indicating that the earnings improvement has meaningful breadth.

• Factors and market structureHistorical path comparison for the Momentum factor

  Compares recent volatility in AI and momentum trades with market movements following strong momentum rallies in the past.

  The report views recent AI-related volatility as similar to the consolidation that historically follows sharp momentum rallies, with rotation volatility potentially easing gradually after deleveraging.

• Capital expenditure and financing analysisHyperscaler capex, free cash flow, and external financing framework

  Compares capital expenditures, operating cash flow, free cash flow, debt issuance, and equity issuance to assess funding sources for AI investment.

  The report shows that hyperscaler capital expenditures are expected to exceed operating cash flow from 2026 through 2028, making debt and equity financing potentially important supplements for AI infrastructure investment.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• S&P 500

  Core research subject

  Strengths

  Second-quarter earnings growth and the share of EPS beats were both stronger than the consensus at the start of the season, while 2027 earnings expectations were broadly revised upward.

  Weaknesses

  Some earnings growth was driven by “other income” at megacap technology companies, while median margins have fluctuated sideways over recent quarters.

  Comparison

  Equal-weighted S&P 500 price and EPS have risen steadily in tandem, indicating that earnings improvement is not confined entirely to market-cap-weighted megacap companies.

  Risks

  Input costs, tariffs, energy prices, and downward margin revisions could weigh on corporate earnings.

• AI infrastructure stocks

  Primary contributor to earnings growth

  Strengths

  Expected to contribute nearly one-third of second-quarter S&P 500 earnings growth and more than half of growth during the remainder of 2026 and in 2027.

  Weaknesses

  Related trades are highly volatile, and the market is more sensitive to earnings delivery and investment returns.

  Comparison

  Compared with non-AI sectors, AI infrastructure makes a more concentrated contribution to index earnings growth, although the magnitude of recent estimate upgrades was smaller than in the previous quarter.

  Risks

  Overly rapid capital expenditure growth, higher financing costs, and AI monetization below expectations.

• Hyperscalers

  Core vehicles for AI capital expenditure and monetization

  Strengths

  Cloud revenue grew 48% year over year in the second quarter, and expectations for future revenue growth continue to strengthen.

  Weaknesses

  Capital expenditures are expected to exceed operating cash flow from 2026 through 2028, putting pressure on free cash flow.

  Comparison

  Cloud growth at Alphabet, Amazon, and Microsoft generally exceeded consensus, while Meta's revenue growth was approximately 28% and in line with consensus.

  Risks

  Increased debt and equity financing could affect credit spreads, expectations for equity dilution, and valuations.

• TMT stocks

  Sector with weak market reactions after earnings beats

  Strengths

  Earnings and revenue at several large technology companies continued to exceed expectations.

  Weaknesses

  Next-day price rewards after EPS beats were insufficient; the median TMT stock that beat EPS underperformed the S&P 500 by approximately 192 basis points.

  Comparison

  The median performance of non-TMT stocks after EPS beats was an outperformance of approximately 75 basis points, whereas historically S&P 500 stocks that beat EPS typically outperformed by approximately 95 basis points.

  Risks

  High valuations, crowded investor positioning, and doubts about AI capital expenditures could weaken price reactions.

• Investment-grade credit

  Potentially affected asset from external financing of AI capital expenditures

  Strengths

  Large technology companies and cloud providers continue to have strong cash flows and access to financing.

  Weaknesses

  Capital expenditures exceeding cash flow could increase reliance on debt financing.

  Comparison

  The report cites credit strategy views expecting approximately $400 billion of global investment-grade debt issuance by related companies in 2027.

  Risks

  Increased supply and leverage could create pressure on credit spreads.

Key data

• Share of S&P 500 companies that had reported second-quarter results61%As of July 31, 2026, the companies that had reported represented approximately 66% of S&P 500 market capitalization.
• Share of significant EPS beats64%The share of companies that had reported whose EPS exceeded consensus by at least one estimate standard deviation was at a historically high level.
• S&P 500 second-quarter year-over-year EPS growth45%Includes the impact of “other income” at megacap technology companies such as Alphabet, Amazon, and Microsoft.
• S&P 500 second-quarter year-over-year EPS growth excluding “other income”26%Excluding non-core equity-investment-related gains, growth remained above the first quarter and was the fastest since 2021.
• Second-quarter year-over-year EPS growth for the median S&P 500 company12%Above the 9% consensus expectation before the start of earnings season.
• Bottom-up S&P 500 EPS consensus revision for 2027+1%Raised since the beginning of the third quarter, with the strongest revisions in Energy and Financials.
• Hyperscaler second-quarter capital expenditures$182 billionAlongside approximately $5 billion of free cash flow, $51 billion of debt issuance, and $50 billion of equity issuance.
• Hyperscaler capital expenditure expectations for 2027over $1 trillionMore than $100 billion above expectations before earnings season; the report notes that 2027 expectations rose from $929 billion to over $1 trillion.
• Second-quarter cloud revenue growth48% year/yearCloud revenue growth at Alphabet, Amazon, and Microsoft exceeded consensus and accelerated from 39% in the first quarter.

Impact & implications

For US equity allocations, the report's main implication is that short-term AI trading volatility does not necessarily undermine the earnings trend. S&P 500 earnings momentum and estimate revisions continue to support a constructive market view. However, investors should distinguish headline EPS growth boosted by non-core “other income” from improvements in operating earnings, while monitoring the effects of AI capital expenditure financing on free cash flow, credit markets, and valuation tolerance.

Risks

• Rising input costs, tariffs, and energy prices could compress corporate margins.
• Hyperscaler capital expenditures continuing to exceed operating cash flow could create free cash flow and financing pressures.
• If returns on AI investment fall below market expectations, valuation repricing could follow.
• Weak price rewards after TMT earnings beats indicate vulnerability from crowded trades and elevated expectations.
• “Other income” at megacap technology companies is boosting headline EPS, which could reduce the sustainability of headline earnings growth.

What to watch

• Nvidia plans to report results on August 26, 2026, and its results will affect the AI infrastructure earnings narrative.
• Whether subsequent S&P 500 company reports continue to maintain a high EPS beat rate.
• Whether upward revisions to 2027 EPS consensus spread from Energy and Financials to more industries.
• Whether hyperscaler capital expenditure expectations for 2026 and 2027 continue to rise.
• Debt and equity financing volumes, investment-grade credit spreads, and changes in free cash flow.
• Whether third-quarter margin expectations for consumer-related stocks and most companies that have reported continue to be revised downward.