60% of U.S. listed companies’ EPS significantly exceeded expectations! Is the earnings cycle underlying the market rally shifting?

The earnings season is in full bloom—why is the U.S. equity market continuing to strengthen? Unpacking the underlying logic of the earnings cycle and exchange-rate impacts. The Q2 2025 U.S. earnings season is unfolding vigorously. Despite high base-year comparisons and concerns over economic slowdown, actual results have far surpassed market expectations. To date, roughly 30% of S&P 500 constituents have reported earnings, with 84% beating consensus EPS estimates and 79% exceeding revenue expectations. This robust performance stems not only from improved profit margins but also from genuine top-line growth. This is more than just a one-off quarterly surprise—it reflects a structural shift in U.S. corporate earnings logic. Where does the earnings momentum come from? According to Goldman Sachs data, 60% of companies delivered EPS results more than one standard deviation above consensus—an unusually high figure compared to the historical average of 48%. Crucially, this earnings expansion is no longer driven solely by a single sector (e.g., technology), but has broadened across multiple industries: ・ Technology and communications continue to outperform: AI investment enthusiasm and surging demand for data centers are driving substantial revenue growth. ・ Industrial and healthcare sectors are stepping up: rising capital expenditures and R&D investments are unlocking medium-term growth potential. ・ Consumer discretionary and materials sectors remain relatively weak: demand softness in certain categories—or ongoing supply-chain and pricing constraints—continue to weigh on performance. Notably, revenue per employee has reached an all-time high, indicating that earnings improvement is not merely the result of cost-cutting, but rather reflects genuine gains in operational efficiency. Why is the weakening U.S. dollar so critical for corporate profits? Exchange-rate movements are a key driver behind this earnings improvement. The U.S. Dollar Index declined over 10% in the first half of 2025. This depreciation has materially benefited U.S. exporters: ・ A 10% decline in the dollar lifts EPS by approximately 4%. ・ It simultaneously offsets roughly 3% of the negative impact stemming from tariffs and rising input costs. A weaker dollar effectively lowers the overseas price of U.S. goods, enhancing global competitiveness—and boosts the dollar value of multinational corporations’ foreign earnings when translated back into U.S. dollars for financial reporting. Why is the market reacting so calmly to these stellar earnings?

U.S. earnings surged during the latest earnings season—where’s the ‘water’ hiding in these numbers?

The Q2 2026 U.S. earnings season is reshaping market expectations for corporate profitability. S&P 500 companies’ year-on-year EPS growth briefly reached 45%, far exceeding the ~22% consensus forecast at the start of the quarter; the proportion of companies beating EPS estimates also stands at a historical high. Yet beneath these impressive figures, the composition of earnings is changing. Goldman Sachs analysis reveals that roughly 19 percentage points of the S&P 500’s Q2 EPS growth came from ‘other income’—primarily unrealized gains on equity investments—recorded by Alphabet and Amazon, rather than organic operating profit growth. Excluding these non-operating items, the S&P 500’s Q2 EPS growth still stood at ~26%, confirming that fundamentals remain sound. However, U.S. corporate earnings are becoming increasingly concentrated among a handful of AI beneficiaries: mega-cap tech firms continue ramping up capital expenditures and are now relying heavily on debt and equity financing to fund AI infrastructure investments. In other words, the central question of this earnings season is not whether profits are growing—but where that growth originates, and whether it is sustainable. Nearly half of the 45% EPS growth came from investment income The most closely watched statistic this quarter is the S&P 500’s 45% year-on-year EPS growth—a figure substantially higher than prior expectations. Yet Goldman Sachs notes that a significant portion originated from the ‘other income’ line item. Data shows Alphabet and Amazon together contributed approximately 19 percentage points to S&P 500 EPS growth in Q2, primarily from unrealized gains on private equity investments; Microsoft also reported ~$3 billion in other income. Specifically, Alphabet’s Q2 other income totaled ~$98 billion, and Amazon’s ~$53 billion—largely attributable to upward revaluations of private company stakes. After stripping out these items, the S&P 500’s Q2 EPS growth falls to ~26%. While markedly lower than the headline 45%, it remains one of the strongest growth rates since 2021. This implies that U.S. earnings are not being artificially inflated purely through accounting maneuvers—but earnings quality is evolving: investment income is becoming an increasingly vital component of large tech firms’ profits. Data shows that in Q2 2026, ‘other income’ accounted for 61% of GAAP net income for mega-cap tech firms—significantly higher than historical norms. The better the earnings, the less the market rewards them If headline earnings remain strong, market reactions tell a different story. As of July 31, 61% of S&P 500 companies had reported Q2 results—covering approximately 66% of the index’s total market capitalization. Roughly 64% of those companies beat EPS estimates by at least one standard deviation—a ratio approaching historical highs. Yet the stock-price gains following earnings beats have been notably muted compared to prior periods.

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