Investment Review №344. A Commitment to Techno-Optimism

The Q1 earnings season is reshaping perceptions of the ongoing rally. For much of this cycle, the market has been criticized for its narrow breadth, with gains concentrated in tech mega caps. Fresh data suggests a different picture—growth has become genuinely broad-based.

According to FactSet, roughly 63% of S&P 500 companies have reported. Of those, 84% beat EPS expectations, 78% and 76% above 5- and 10-year averages, respectively. The median company’s EPS growth has reached double digits for the first time in four years, indicating earnings are no longer driven solely by the Magnificent Seven. Margins for the rest of the S&P 500 (excluding IT and Financials) have reversed a 3-year downtrend, with operating cash flow for U.S. non‑financial corporations growing nearly 20% YoY. By sector, profit growth is the strongest in Communication Services (nearly 53.5%), IT (just over 49%), Consumer Discretionary (34%), Materials (32%), Financials (21%), and Industrials (19%). The S&P 500’s net margin for the quarter is 13.4%, the highest since 2009.

The growth breadth mitigates concentration risk, arguing for exposure not only through technology‑heavy funds such as QQQ and XLK, but also through the Invesco S&P 500 Equal Weight ETF (RSP), the Industrial Select Sector SPDR Fund (XLI), and the Financial Select Sector SPDR Fund (XLF). One of the market’s hottest themes is identifying AI capex beneficiaries beyond the Magnificent Seven—particularly DC power providers, electrical equipment manufacturers, and grid infrastructure players. Investors can access this exposure via the Utilities Select Sector SPDR (XLU) and through names such as Eaton Corporation (ETN), Quanta Services (PWR), Vertiv Holdings (VRT), and GE Vernova (GEV).

Valuation discipline still matters. The S&P 500’s forward P/E is 20.9x—above the 5‑year average of 19.9x and the 10‑year average of 18.9x. Given this earnings season, those levels appear fair with room to run, but hyperscalers’ capex is already approaching 75% of cash flow, implying correlations with late‑1990s. Any economic wobble could unsettle forecasts, so diversifying into undervalued names can help long‑term investors weather potential drawdowns.

Profits are broadly rising, margins are near all-time highs, and cash flow is strong—solid foundations for further upside. That said, paying about 21x forward earnings only makes sense if 20%+ growth materializes. Any disappointment at these valuations makes a correction likely, while for long‑term investors, that’s a timing issue rather than a thesis breaker, best mitigated by diversification into cheaper assets.