A few days ago, I went into the kitchen thinking I was on firm footing in my own house, but I didn’t realize my wife had left the dishwasher door open. In the pitch dark, I tripped over the open dishwasher door, flipped in the air, and landed hard on my right arm. I sure hope the stock markets are on firmer footing than I am.
The second quarter wrapped up at the end of June on a good note. It ended up being the best quarter for the indexes since quarter two of 2020 and more than made up for the first-quarter losses. Looking at performance year-to-date, the DOW Jones returned 8.9%, the S&P 500 returned 10.2%, and the tech-heavy Nasdaq gained 12.8%. The technology sector led all sectors despite the sharp pullback in June, with industrials following, while real estate companies struggled.
As the quarter ends, corporate America closes its books and prepares to report results to shareholders over the coming weeks. Though first-quarter index returns were negative, earnings were great, with S&P 500 companies as a group growing earnings per share (EPS) by 29%. Analysts estimate that second-quarter earnings will be up by over 20%.
If earnings growth is going to approach 20% or more again, the technology sector will have to do more heavy lifting. Memory chip maker Micron did its part by growing its earnings 12-fold and contributing 4.5 points of the S&P 500 EPS growth on its own. In fact, Micron and NVIDIA are expected to drive 40% of overall S&P 500 EPS growth, and, according to Goldman Sachs estimates, artificial intelligence (AI) infrastructure stocks are expected to contribute 60% of S&P 500 EPS. Besides technology, only energy had positive earnings. The market will again be heavily dependent on the technology sector to carry the load for the market as a whole.
If earnings are going to hit the estimates in quarter two and the second half of 2026, profit margins will have to increase quite a bit — enough to move from low-teens revenue growth into at least double that pace of earnings growth. Workers’ increased productivity from using AI should gradually show up as higher profit margins in the second half.
The AI boom should drive another quarter of strong earnings growth. Adding a boost to oil prices from the Iran conflict will help energy contribute, but technology is expected to continue to do most of the work. Similar to last quarter, investors will be watching to see whether there is a significant return on the massive AI investment.
Historically, the market rewards strong earnings: when S&P 500 earnings grow in double digits, the average annual S&P 500 index return is over 14%.
The economic backdrop remained resilient in June despite several geopolitical developments that continue to bring about market uncertainty. The economy looks to be on stable footing as it navigates several unique issues in the second half of this year: the AI buildout, a new Federal Reserve chairman, and a midterm election that will probably get feisty.
I got up off the floor but couldn’t lift my toothbrush. X-rays showed nothing was broken, but the doctor suggested that my wife use the delayed-start function on the dishwasher and that I turn on the light so no one gets hurt. The earnings report will also shine a light on America’s companies, and we will see if anything can trip them up.
Have a blessed week!
Richard Baker
This article was written by humans for humans because AI doesn’t have this quality of sarcasm.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. Opinions voiced above are for general information only & not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly.
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Sources: 1. https://finance.yahoo.com/markets/stocks/articles/p-500-nasdaq-futures-fall-113743948.html 2. https://finance.yahoo.com/markets/article/nvidia-micron-and-broadcom-hold-the-stock-markets-fate-in-the-palm-of-their-hands-130753236.html
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.