Preview of the Q 2 earnings season of U.S. stocks: non-technology stocks’ earnings resilience is highlighted, and technology stocks’ “answer sheet” will exceed expectations to pass the test
Financial Associated Press, July 13 (Editor Li Ying) Wall Street is ushering in an earnings season with profits close to historical records, but for investors, the core question still remains: Is this enough to maintain the rapid pace of the U.S. stock bull market? The second-quarter earnings season kicks off on Tuesday. Analysts expect second-quarter profits for S&P 500 companies to rise 24%, which would be one of the best performances in history, according to data compiled by the media.
Financial Associated Press, July 13 (Editor Li Ying) Wall Street is ushering in an earnings season with profits close to historical records, but for investors, the core question still remains: Is this enough to maintain the rapid pace of the U.S. stock bull market? The second-quarter earnings season kicks off on Tuesday. Analysts expect second-quarter profits for S&P 500 companies to rise 24%, which would be one of the best performances in history, according to data compiled by the media. The technology large-cap stocks known as the "Mag7" that usually lead the market rebound have performed weakly during the quarter and have barely participated in the growth of the S&P 500. The index tracking these seven companies only rose 3.2% in the second quarter. Here are the core themes investors are focusing on this earnings season: Earnings for non-tech stocks improve Morgan Stanley strategist Michael Wilson and his team pointed out that U.S. stocks other than technology giants are expected to report strong profits this earnings season, which will further spread the stock market rally. According to the team, the median earnings per share of companies in the S&P 1500 Composite Index increased by more than 10% year-on-year, marking the best performance in the past five years of economic recovery. Wall Street analysts continue to raise profit expectations for consumer discretionary and transportation sectors that are highly tied to economic prosperity. It is worth noting that the S&P 500 equal-weighted index, which aims to balance the influence of technology giants, outperformed the market capitalization-weighted index for the first time since 2022. This means that the market's upward momentum is spreading from a few large technology leaders to the entire market, and the sector rotation pattern is further established. The current market valuation level is rarely matched. Despite a bad start to the year, the S&P 500 Index has risen by more than 10% this year. Violeta Todorova, senior research analyst at Leverage Shares, a European leveraged ETP issuer, said, "In this earnings season, any performance that is just 'in line with expectations' will be regarded as negative, especially for those stocks that have previously led the gains." Wall Street analysts have been aggressively raising their earnings estimates for S&P 500 companies. Data from Ned Davis Research, an independent U.S. stock investment research institution, shows that nearly 64% of the benchmark index component companies received profit increases in May, setting a record. Although this proportion fell slightly to 63.6% in June, it is still high. Ed Clissold, chief U.S. strategist at Ned Davis Research, said: "High valuations tend not to be a problem when earnings growth is strong; but that doesn't mean the market is immune to a correction once earnings per share (EPS) growth slows." Note: The orange line is the historical actual value of the S&P 500 earnings per share year-on-year growth rate, and the line in the gray area is the predicted value. Most sectors of the market are facing slower earnings growth, including consumer discretionary, consumer staples, financials, industrials and healthcare. In sharp contrast, data show that with the influx of funds from AI buyers, chip manufacturers' profits are expected to surge by 136% compared with the same period last year. Technology stocks are undoubtedly the highlight of this earnings season. Data show that in the United States, profits of information technology companies are expected to increase by 67% in the second quarter, ranking second among the S&P 500 index sectors, second only to the energy sector's 118%. However, the market has become increasingly "harsh". Previously, even though Samsung Electronics and Micron Technology delivered explosive results, they failed to push semiconductor stocks higher due to concerns about overvaluation. The MSCI Global Semiconductor and Equipment Index hit a record high on June 22, but has since fallen 6.1%, making this week's earnings reports from ASML and TSMC crucial. The big buyers of AI infrastructure - Alphabet, Amazon, Meta, Microsoft and Oracle - will report earnings in a few weeks, which will provide the market with guidance on whether their investments are paying off. (To know the Q2 financial report release time of major global technology companies, please click on this guide) This group has been the biggest winner in AI deals until recently, when investors began to wonder whether its huge cash outflows could be converted into equivalent gains.
The largest U.S. AI companies are expected to spend more than $700 billion in capital expenditures this year. Note: The orange line represents the Philadelphia Semiconductor Index, and the black line represents the U.S. ultra-large-scale cloud service provider stock portfolio compiled by UBS. The two curves respectively reflect the cumulative gains and losses of the two types of sectors over the same period. The geopolitical conflict in the Middle East is heating up again, and the oil shock that disturbed the market in the early stage may return with a vengeance. Investors will have to wade through a backdrop of inflation hitting a three-year high, rising memory chip prices and expectations of higher interest rates from the Federal Reserve. The industry generally expects that the profit margins of most sectors of the S&P 500 will narrow, with the exception of the two major sectors of energy and raw materials. Savita Subramanian, head of U.S. stocks and quantitative strategies at Bank of America Securities, said that market leadership is shifting and cyclical sectors such as semiconductors are expected to benefit from huge capital expenditures by AI hyperscale cloud service providers. Cyclicals are among the few S&P 500 sectors where Wall Street expects the least pressure on margins. In contrast, growth company profit margins are expected to slip to 30.8% in the second quarter from 35.4% in the January-March period. For the technology "Big Seven", margin compression is expected to be even more dramatic, plummeting to 27.7% this quarter from 36.2% in the previous quarter, as many of these companies are spending hundreds of billions of dollars building AI infrastructure. Share buybacks by Big Tech companies have weakened as they redirect funds toward business expansion. Data shows that Microsoft, Meta, and Apple all expanded their circulating capital in the second quarter. The shift worries many Wall Street strategists because buybacks may no longer be able to offset the impact of new share issuances. Alphabet recently completed a US$85 billion stock issuance, the largest equity financing among S&P 500 stocks this quarter. Super Micro Computer, Constellation Energy, American Electric Power and Digital Realty Trust all issued additional shares. Note: The orange line represents the changing trend of Alphabet’s total number of outstanding shares over the years. Other stock sales outside the major indexes, including SpaceX's record IPO, also contributed to a sharp surge in stock supply. The increase in stock supply will dilute earnings per share, weaken free cash flow, and suppress financial report profitability indicators and market valuations. Erin Kolo, senior vice president of equity and fixed income research at Baird, a high-net-worth wealth service provider, said that in addition to stock issuance, traders are also worried about large-scale debt transactions by hyperscale cloud service providers and other technology companies and their impact on free cash flow. "Wall Street wants to see evidence from these companies that despite these large investments, they are starting to bear fruit. For these companies, cash flow metrics will be particularly important during the second-quarter earnings season." (
The largest U.S. AI companies are expected to spend more than $700 billion in capital expenditures this year. Note: The orange line represents the Philadelphia Semiconductor Index, and the black line represents the U.S. ultra-large-scale cloud service provider stock portfolio compiled by UBS. The two curves respectively reflect the cumulative gains and losses of the two types of sectors over the same period. The geopolitical conflict in the Middle East is heating up again, and the oil shock that disturbed the market in the early stage may return with a vengeance. Investors will have to wade through a backdrop of inflation hitting a three-year high, rising memory chip prices and expectations of higher interest rates from the Federal Reserve. The industry generally expects that the profit margins of most sectors of the S&P 500 will narrow, with the exception of the two major sectors of energy and raw materials. Savita Subramanian, head of U.S. stocks and quantitative strategies at Bank of America Securities, said that market leadership is shifting and cyclical sectors such as semiconductors are expected to benefit from huge capital expenditures by AI hyperscale cloud service providers. Cyclicals are among the few S&P 500 sectors where Wall Street expects the least pressure on margins. In contrast, growth company profit margins are expected to slip to 30.8% in the second quarter from 35.4% in the January-March period. For the technology "Big Seven", margin compression is expected to be even more dramatic, plummeting to 27.7% this quarter from 36.2% in the previous quarter, as many of these companies are spending hundreds of billions of dollars building AI infrastructure. Share buybacks by Big Tech companies have weakened as they redirect funds toward business expansion. Data shows that Microsoft, Meta, and Apple all expanded their circulating capital in the second quarter. The shift worries many Wall Street strategists because buybacks may no longer be able to offset the impact of new share issuances. Alphabet recently completed a US$85 billion stock issuance, the largest equity financing among S&P 500 stocks this quarter. Super Micro Computer, Constellation Energy, American Electric Power and Digital Realty Trust all issued additional shares. Note: The orange line represents the changing trend of Alphabet’s total number of outstanding shares over the years. Other stock sales outside the major indexes, including SpaceX's record IPO, also contributed to a sharp surge in stock supply. The increase in stock supply will dilute earnings per share, weaken free cash flow, and suppress financial report profitability indicators and market valuations. Erin Kolo, senior vice president of equity and fixed income research at Baird, a high-net-worth wealth service provider, said that in addition to stock issuance, traders are also worried about large-scale debt transactions by hyperscale cloud service providers and other technology companies and their impact on free cash flow. "Wall Street wants to see evidence from these companies that despite these large investments, they are starting to bear fruit. For these companies, cash flow metrics will be particularly important during the second-quarter earnings season." (