The S&P 500 (^GSPC) is not just meeting expectations for Q1 earnings; it is significantly surpassing them. This earnings season is being hailed as one of the strongest in two decades, marked by accelerating profit growth, high beat rates, and analysts revising their estimates upward rather than downward.
While this news is promising, it comes with a cautionary note: Wall Street may already be considering these impressive earnings as the new normal.
According to Deutsche Bank, this is shaping up to be “one of the best earnings seasons in 20 years,” as illustrated by charts indicating a considerable share of S&P 500 companies surpassing earnings forecasts. Quarterly profit growth is currently near 25%, more than double the typical rate during non-recession periods.
FactSet corroborates these findings, noting that by early May, 84% of S&P 500 companies had outperformed earnings estimates, 81% exceeded revenue expectations, and Q1 earnings growth was tracking at a robust 27%, a significant jump from the 13% recorded at the end of the quarter.
This performance suggests not merely a low bar being cleared, but an upward shift in expectations. In a notable deviation from typical trends where analysts often lower forecasts throughout the year, current data from Bank of America indicates that estimates for S&P 500 earnings in 2026 and 2027 are rising sharply.
Goldman Sachs has noted a similar phenomenon, identifying a trend in which bottom-up consensus estimates have increased since the beginning of the year. An impressive 45% of S&P 500 companies offering guidance have pointed to figures exceeding consensus estimates, higher than the 40% historical average.
This earnings strength exhibits notable breadth; Deutsche Bank points out that, for the first time in four years, all 11 sectors within the index are expected to report year-on-year earnings growth.
Nevertheless, the situation becomes more complex at the index level. Notably, the earnings performance is considerably influenced by major corporations. FactSet highlights that Alphabet (GOOGL), Amazon (AMZN), and Meta (META) contributed to 71% of the recent increase in S&P 500 earnings. Goldman Sachs’ profit growth analysis further indicates a significant disparity between the overall index and the performance of typical companies, showcasing how a few top players can distort broader statistics.
While the reception to companies that beat earnings forecasts has been mostly positive, with gains around 1.2% that align with the five-year average, those failing to meet expectations face harsher consequences. Companies that miss estimates have experienced an average decline of 4.2%, compared to a historical average of 2.9%. This reflects a market attitude where good performance is anticipated, and poor results are swiftly penalised.
In summary, the current earnings season signals a remarkable level of corporate resilience and performance, with indicators suggesting sustained strength across sectors. However, investors remain discerning, and as companies surpass expectations, the market’s appetite for consistent, exceptional results appears insatiable.
