Did U.S. equities miss the current 'good news'? Earnings expectations are unusually upgraded; strategists say fundamentals are 'too strong to be true'.

A clear divergence is emerging between corporate earnings and U.S. equity price performance: fundamentals continue to improve, yet markets remain constrained by high interest rates and macroeconomic uncertainty—profit growth in certain sectors has yet to be fully reflected in stock prices. According to MarketWatch, Patrick Palfrey, Portfolio Strategy Head at Seaport Research Partners, stated that the current corporate earnings environment is exceptionally robust, with analyst earnings expectations continuing to be revised upward. He noted that such a scenario is historically rare—'almost outside the realm of normal probability'—and underscores the remarkable resilience of corporate fundamentals. However, elevated interest rates continue to suppress valuation multiples, and investor concerns about earnings sustainability have muted the market’s response to this fundamental tailwind. Palfrey highlighted industrial and transportation stocks as particularly notable: their fundamentals are accelerating, yet share prices have not yet rewarded them accordingly—presenting a clear mispricing opportunity. Meanwhile, interest rates and macro factors may still disrupt markets. Rising oil prices are weighing on U.S. indices; the U.S. 10-year Treasury yield has climbed to 4.926%; and the Federal Reserve’s upcoming rate decision remains uncertain—with markets currently assigning roughly a 60% probability to another hike. Palfrey warned that if the Fed reiterates the necessity of further tightening, it could deliver a short-term shock to equities. Strong earnings, historically anomalous upward revisions Palfrey pointed out that S&P 500 constituents’ Q2 earnings per share (EPS) surged 55% year-on-year; even excluding unrealized gains, growth stood at 35%—a 'very, very strong' result. This growth was primarily driven by technology firms, especially semiconductors—but he emphasized that the broader corporate earnings environment remains healthy. More notably, the direction of analyst earnings revisions defies historical norms. Palfrey explained that expectations typically start high at the beginning of the year and are gradually lowered as quarters progress—but currently, analysts are still revising expectations upward, a stark deviation from precedent. 'This situation is almost outside the realm of normal probability—that’s precisely how strong corporate fundamentals really are.'

U.S. equities’ earnings season delivered explosive profit growth—so where’s the ‘water’?

The second-quarter 2026 earnings season for U.S. equities is reshaping market expectations for profitability. S&P 500 companies’ EPS growth hit 45% year-on-year—far exceeding the ~22% consensus expectation at the start of the quarter—and the proportion of earnings surprises reached a historical high. Yet beneath these impressive figures, the earnings composition is shifting. Goldman Sachs’ breakdown reveals that roughly 19 percentage points of the S&P 500’s Q2 EPS growth stemmed from 'other income' at Alphabet and Amazon—primarily unrealized gains on equity investments—not core operating profit growth. Excluding these non-operating items, the S&P 500’s Q2 EPS growth still stood at ~26%, indicating fundamentals remain sound. At the same time, however, U.S. earnings are becoming increasingly reliant on a handful of AI-benefiting firms. Mega-cap tech companies continue expanding capital expenditures and are now financing AI infrastructure investments via both debt and equity issuance. In other words, the central question of this earnings season is not 'Are profits growing?' but rather 'Where is that growth coming from—and is it sustainable?' 45% EPS growth—nearly half from investment income The most closely watched figure this quarter is the S&P 500’s 45% year-on-year EPS growth. While substantially above prior expectations, Goldman Sachs analysis shows a sizable portion originated from the 'other income' line item. Data show Alphabet and Amazon together contributed approximately 19 percentage points to S&P 500 EPS growth in Q2—mainly from unrealized gains on equity holdings. Microsoft also contributed roughly $3 billion in other income. Specifically, Alphabet’s quarterly other income totaled ~$98 billion, and Amazon’s ~$53 billion—largely reflecting mark-ups in the valuations of private-company equity stakes. After stripping out these items, the S&P 500’s Q2 EPS growth fell to ~26%. Though markedly lower than the headline 45%, it remains among the strongest since 2021. This implies U.S. earnings aren’t being artificially inflated solely by accounting adjustments—but earnings quality is evolving: investment income is becoming an increasingly significant component of mega-cap tech firms’ profits. Data show that in Q2 2026, 'other income' accounted for 61% of GAAP profits for ultra-large-cap tech companies—well above multi-year historical averages. The better the earnings, the less the market rewards them If the headline numbers remain robust, the market’s reaction has nonetheless shifted. As of July 31, 61% of S&P 500 companies had reported Q2 results—covering ~66% of the index’s market capitalization. Of those, ~64% beat EPS expectations by at least one standard deviation—a ratio approaching historical highs. Yet the stock-price gains following earnings beats have been markedly weaker than in prior periods.

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