U.S. stocks are entering an earnings season with exceptionally high expectations, particularly for the S&P 500, where Q2 earnings per share (EPS) are projected to reach a record high of $81.21, a 23% year-over-year increase. Stripping out the technology sector, growth is still a robust 11%, indicating broad strength beyond just AI. Energy earnings are anticipated to soar by 122% due to an oil spike, while technology is expected to rise by 61%, and materials by 35%. Healthcare is the only sector projected to contract, by 8.7%.
Analysts are watching key factors such as AI monetization and infrastructure capacity, as well as corporate margins. Despite supply-chain pressures and higher energy costs from the Strait of Hormuz disruption, Q2 margins are forecast at 14.85%, slightly below Q1's record 15.4%. If companies can guide margins higher even with oil prices above $90, it would confound bearish outlooks. The U.S. economic surprise index is at a two-year high, and early reporters are largely beating expectations, suggesting that despite the high bar, it is likely to be cleared.
Several prominent companies are reporting next week, including banking giants JPMorgan Chase and Goldman Sachs, alongside Netflix, BlackRock, and Johnson & Johnson. These reports will be crucial in setting the tone for the quarter and providing insights into consumer strength and broader credit trends, especially with the 10s/3M yield curve steepening to an average of 72 basis points in Q2, which benefits financials. Investors will also be scrutinizing the Consumer Price Index (CPI) report for June, due next week, to evaluate inflation trends and their potential impact on interest rates, particularly given the recent rise in oil prices.
