TL;DR

· A US Stock Earnings Revision Report states that the S&P 500 EPS is 14% above the 90-year trend channel, the highest since 1955.

· Public FactSet data indicates that the S&P 500 Q2 earnings growth rate is approximately in the range of 23% to 25%.

· Earnings growth is shifting from large-cap tech stocks to more companies, but there are still divergences between industries, and the high-profit benchmark has also raised the difficulty of meeting future earnings expectations.

The lofty valuation of US stocks is receiving a stronger fundamental support: not only is corporate earnings continuing to grow, but analysts are also consistently raising future expectations.

A US Stock Earnings Revision Report, which consolidates data from multiple institutions, shows that the S&P 500 earnings per share have deviated above the trend channel based on over 90 years of historical data by approximately 14%, marking the first time such a high deviation has been reached since 1955. The report also notes that the proportion of companies beating earnings expectations, the magnitude of sales beating expectations, and analyst earnings upgrades are at historically strong levels.

This set of data explains why US stocks can still find support despite high valuations. Over the past year, AI investing, interest rate expectations, and liquidity have collectively driven the rise of risk assets; as the index continues to climb, relying solely on narratives is no longer sufficient, and corporate profits must continue to grow to absorb higher valuations.

However, strong earnings also bring another side: when profit levels are already significantly above the long-term trend, market expectations will rise in tandem. Simply meeting forecasts may no longer be sufficient to drive stock prices higher; once revenue, profit margins, or future guidance fall below expectations, the pressure on high valuations will also be greater.

S&P 500 quarterly EPS rises above the long-term trend channel. The report states that it is 14% above the 90-year trend channel, the first time since 1955.

How Strong Are Earnings: S&P 500 EPS Rises to a Rare Position in 70 Years

The assessment of the current earnings strength in the report is mainly from three aspects.

First, the S&P 500 EPS is continuously rising in absolute terms and has significantly surpassed the long-term trend range. According to calculations by Deutsche Bank quoted in the report, strong earnings growth over multiple quarters has pushed the S&P 500 EPS above the long-term trend channel by 14%.

Second, actual corporate performance has generally been better than analysts' forecasts. The report states that the coverage of S&P 500 earnings beats is near a historical high, and the overall sales surprise rate has also risen to a nearly five-year high.

Third, earnings expectations have not been cut after the start of the earnings season, as is usually the case, but have continued to rise. The report shows that in July, analysts raised their bottom-up EPS estimate for the S&P 500 by 0.3%. Historically, analysts have tended to lower their forecasts in the first month of the quarter to reflect more cautious management guidance and macro assumptions.

These signals together indicate that the current U.S. stock market is not simply being driven by valuation expansion. Corporate profits themselves are providing support, and actual performance continues to exceed previous expectations.

However, "strong earnings" does not mean all data can be directly interchangeable.

One striking figure given in the report is that the S&P 500 saw second-quarter earnings growth of 33.2%, a rare high in over 30 years, second only to the financial crisis and the unique post-pandemic recovery phase.

It is worth noting that in the publicly available data cited in this article, FactSet estimated on July 2nd that the S&P 500's second-quarter earnings would grow by 23.3%; Axios cited FactSet's figure as 22.5%, with Bloomberg's estimate around 25%. Therefore, a more accurate statement would be: based on public estimates, the S&P 500's second-quarter earnings growth is roughly in the range of 23% to 25%; the 33.2% in the report may have used different statistical timing, sample scope, or adjustments.

However, even based on the 23% to 25% estimates, the S&P 500's second-quarter earnings growth remains at a high level, and the profit side continues to provide fundamental support to the index.

Where the Strength Lies: Earnings Beats and Upward Revisions

The value of this earnings improvement lies not only in the high second-quarter numbers but also in the simultaneous rise of actual performance and future expectations.

Usually, as companies enter the earnings season, analysts gradually lower their forecasts based on company guidance, cost changes, and macro risks. However, this earnings season has seen the opposite: actual earnings have consistently beaten expectations, and analysts have subsequently continued to raise future EPS.

The report cites data from Carson, stating that at the beginning of the year, the market expected the S&P 500 to achieve about 13% earnings growth by 2026. This expectation has now risen to close to 28%. This figure is best labeled as the institution-cited data in the report, rather than the public market's uniform consensus.

The more significant change is that the stock market bulls now not only rely on rate cut expectations, liquidity, or AI narrative, but also start to receive support from earnings upgrades.

As long as corporate profits continue to exceed forecasts, and analysts continue to raise future earnings expectations, high valuations may gradually be digested through earnings growth. Conversely, once earnings revisions stop rising, the market will lose a key support, and valuation issues will once again become prominent.

The proportion of S&P 500 companies beating earnings estimates has risen to near a historical high, and the overall magnitude of sales beating estimates has also reached a five-year high

Has the Diffusion Already Occurred: Tech Stocks Still Leading, More Companies Starting to Relay

Whether strong earnings can continue depends on whether the growth has shifted from a few large tech companies to a more broad-based market.

FactSet's July 20 split data shows that the overall blended earnings growth rate in the second quarter for the S&P 500 was 24.7%, with the earnings growth rate of 493 companies excluding the "Fab Seven" at 22.8%. This means that the index's earnings growth is not solely driven by a few mega-cap tech companies.

However, the drag from the heavyweight stocks should not be ignored. If Micron and NVIDIA are further excluded, the S&P 500's second-quarter earnings growth rate would fall to 16.8%. The report also notes that after excluding star companies and their one-time gains, the median earnings growth rate for S&P 500 median companies is around 13.8%.

These numbers point to a more balanced assessment: earnings growth has spread, but large tech and semiconductor companies remain crucial engines.

Data at the industry level also needs to be viewed with caution.

According to Deutsche Bank, all industries in the S&P 500 are expected to achieve positive growth for the second consecutive quarter, with eight of the 11 industries likely seeing double-digit growth. Meanwhile, as per FactSet's July 2 public gauge, 10 out of the 11 industries are expected to achieve year-on-year earnings growth, with healthcare being the only industry expected to see a decline in earnings; on the revenue side, all 11 industries are expected to achieve year-on-year growth.

From this, it can be seen that earnings improvement has covered most industries, but differentiation still exists among industries.

It is worth noting that revenue growth indicates that overall company sales are still expanding, but final profits will be affected by factors such as wages, raw materials, depreciation, product mix, pricing power, and one-time gains and losses. With the same revenue growth rate, the ability to convert it into profits may vary significantly across different industries.

The true value of profit spread lies in the widening profit base of the S&P 500, as the index is no longer solely reliant on a few tech giants. However, this is still not enough to prove that all companies and industries have entered a synchronized growth cycle.

By report measure, profit growth in most S&P 500 industries is accelerating, and companies outside of the technology and large-cap growth stocks are also contributing more to the index's profit growth.

Why Stronger Profits Lead to Higher Earnings Thresholds

Strong profits can support valuations but can also create a higher bar for comparison.

Based on reports, the S&P 500 EPS is now 14% above the 90-year trend channel. This does not mean that corporate earnings are about to peak, nor can it be directly inferred that the market is about to pull back; it indicates that the current profit level is significantly above the long-term trend, and future year-over-year growth will face stronger pressure from a high base.

When earnings expectations were raised from around 13% at the beginning of the year to nearly 28%, the market had already priced in quite optimistic growth assumptions. The test companies will face thereafter is no longer just "whether there is growth," but whether the growth rate can continue to exceed the continuously revised forecasts.

Reports show that full-year profit growth expectations for the S&P 500 have risen from around 13% at the beginning of the year to close to 28%.

This also implies that there may be a seemingly contradictory situation during earnings season: overall profits remain strong, but individual stocks may not necessarily rise due to earnings growth.

The reason is that stock prices reflect the variance between actual results and market expectations. If the market has already anticipated a 20% revenue growth and the actual growth is 20%, it will only be considered meeting expectations; if the profit margin, orders, or future guidance are slightly below what the market had previously envisioned, the stock price may still fall.

Higher profits also increase the sensitivity of valuations to bad news. Slower sales growth, margin pressure from costs, lower-than-expected AI capital expenditure returns, or a more conservative outlook from management for the next quarter could all trigger more significant valuation adjustments.

Therefore, stronger profits do not necessarily mean lower market risk. It means that the fundamental support is stronger, but it also means that investors' demands are higher.

In July, analysts raised their quarterly EPS expectations for the S&P 500 by 0.3%; historically, analysts typically lower profit expectations in the first month of the quarter.

What's Next: Revenue, Profit Margin, and Sustainability of Earnings Upside

Next, to assess whether U.S. stocks can continue to support the index, attention should be paid to four more specific variables.

First is revenue growth. While profits can be temporarily boosted by cost control, buybacks, or one-time gains, revenue is a better indicator of genuine demand expansion. If sales growth starts to significantly slow down, the sustainability of earnings expansion will also be questioned.

Second is profit margin. The current profit growth partly comes from the high profit margins and scale effects of large tech companies. If wages, energy, depreciation, or financing costs rise, revenue growth may not necessarily translate proportionally into profits.

Third is the return on AI-related capital expenditures. Large tech companies are still investing massive amounts of money in building data centers, purchasing chips, and expanding cloud infrastructure. Investors need to see these expenses gradually convert into cloud revenue, software subscriptions, advertising efficiency, or enterprise AI service revenue.

Fourth is the direction of earnings revisions. Whether analysts continue to raise EPS forecasts for 2026 and 2027 may be more critical than the earnings growth rate for a single quarter. As long as expectations keep being revised upwards, high valuations can still find support; however, if earnings revisions peak or turn downward, the market's tolerance for valuations will quickly diminish.

Overall, the most positive signal from this round of U.S. earnings is the simultaneous improvement in short-term performance, growth breadth, and future expectations. The index's rise relies not only on liquidity and AI themes but also on corporate profits providing support.

However, this support has already been built on exceptionally high profit levels and market expectations.

The stronger the earnings, the more reason there is to maintain valuations; the higher the expectations, the greater the cost of financial reporting errors. What will truly determine whether U.S. stocks can continue to rise is no longer whether companies can deliver a "decent" earnings report but whether revenue, profit margin, and future guidance can sustainably exceed the increasingly elevated market thresholds.

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