Transcript
Amada Agati:
With all the macro noise right now, it’s easy to assume markets are getting ahead of themselves. But when you look under the hood, earnings are telling a more constructive story.
We’re positive on equities despite all the geopolitical noise. The earnings outlook is still pretty strong and revisions keep moving higher. And believe it or not … this is now the third quarter in row where revisions have been positive. That’s not something you typically see outside of the recovery phase coming out of recessions.
Now, to be fair, Q1 comes with a little asterisk. Nearly all of the projected earnings growth is concentrated in just two sectors: Tech and Financials, ironically among the price performance laggards in Q1.
Energy’s a good example of that disconnect. Returns have been strong, but consensus earnings growth for the sector is still negative in Q1. Now, that shifts meaningfully in Q2, with Energy earnings set to grow ~100%, but that’s a story for another video. At this point, it’s shaping up to be a solid quarter. Growth is running well into the double digits and companies are clearing a fairly high bar.
84% of companies are beating expectations. Even more impressive? The upside surprise of more than 1,200bps. And revenue growth is also coming in strong at +10% with every sector contributing. And this isn’t just a Mag7 story either. We’re seeing strength in banks, asset managers, and parts of Industrials too.
We’re also seeing signs of profit margin expansion across several sectors … and that’s after the S&P 500 margin reached an all-time high of 14.3% last quarter. Given where margins already are, that speaks to earnings quality … and it helps create a buffer as inflation pressures start to resurface.
Even with strong Q1 results, there’s still skepticism. Investors are asking real questions about AI capex … how durable the cycle truly is, and when those investments start to generate attractive returns. That said, valuations have been reset over the last few months giving investors something to nibble at that feels more resilient in an environment shaped by inflation and global conflict.
Software is one area we’ll be watching closely. Despite steep year-to-date price declines over concerns that “AI is going to eat software’s lunch”, Q1 revisions were actually positive for nearly every company. Even ORCL, with CDS priced higher than in 2008, saw top and bottom-line revisions for 2026 and 2027 move higher after they reported earnings. That sets the stage for tech hardware names. If the AI cycle follows the typical path: semis --> tech software --> tech hardware --> everywhere robotics.... we may be entering the next phase.
That means expectations are building around companies like Apple, where earnings growth is finally expected to re-accelerate relative to software for the first time in a few years. So is this Apple’s time to shine? For now, we’ll just say good luck to Apple’s new CEO John Ternus … no pressure.
Looking ahead, full-year earnings growth expectations remain ambitious. Whether they’re achievable will come down to the guidance we get coming out of Q1.
Valuations are still elevated at the top end of the market. The net effect is an S&P 500 that is trading at a forward P/E of 21x – not priced for a prolonged, economically disruptive conflict – let alone concerned about private credit or AI productivity, but a few multiple points below where we started the year.
All that being said, the rally back to new all-time highs has been pretty concentrated, and basically mimics Q1 earnings drivers: Tech, Communication Services, and Financials.
