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Why did earnings support stocks?

The second-quarter results from S&P 500 companies in U.S. markets were one of the main factors behind the summer rally. With earnings season now largely complete, investors have turned their attention to a new market catalyst driven not only by actual profits, but also by analysts raising their forecasts for the months ahead.

According to Evercore ISI strategist Julian Emanuel, the next positive driver for equities is the combination of higher earnings estimates and fewer downward revisions. Emanuel said the seasonal trend in revisions to corporate profitability has reversed and that forecasts continue to move higher, adding in a brief comment: “We are living in extraordinary times.”

What do the numbers say?

FactSet data show that the second-quarter earnings season has run well ahead of market expectations. In particular, the surprises on earnings per share point to one of the strongest periods in years.

  • About 86% of S&P 500 companies beat earnings-per-share expectations.
  • That was above the 5-year average of 78% and the 10-year average of 76%.
  • If the figure holds at 86% by the end of the quarter, it would be the highest positive earnings-surprise rate since the second quarter of 2021.
  • Companies overall reported profits 26.5% above forecasts, far exceeding the 5-year average of 7% and the 10-year average of 7.4%.
  • S&P 500 earnings growth for the second quarter stands at 52%. If sustained, that would be the index's fastest growth since 91.6% in the second quarter of 2021.

Why do forecast revisions matter?

According to Emanuel’s note, estimates for the median company in the index have risen not only for revenue growth, but also for net income and free cash flow yields. That backdrop is helping investors approach the fall with a more positive view of forward profitability, not just past results.

Goldman Sachs strategist Ronnie Walker also emphasized that second-quarter data showed corporate fundamentals remained strong even after revisions. The main risks that could upset this picture are oil prices rising above $100 a barrel and a more hawkish Fed launching a new rate-hike cycle.

How should the market reaction be read?

The latest data suggest the uptrend in U.S. equities is being driven not just by valuation expansion, but by a genuine improvement in earnings. Continued upward revisions to analyst estimates indicate that earnings support may not be limited to the summer and could continue to shape pricing into the fall.

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