Investment Review №351. S&P 500 Hits New Highs

Wall Street is heading through a highly unusual earnings season, with Q2 2026 shaping up as a statistical outlier. Corporate earnings are running 50.4% YoY higher with 89% of S&P 500 companies now reported, or 450 of 503, marking the strongest growth rate since the post-COVID rebound in 2021. More than 85% of companies have beaten estimates, well above the 78% 5-year average, while the aggregate earnings surprise has reached +29.0%, the largest in FactSet’s history going back to 2008. The market has taken notice—the S&P 500 is up ~3% since July 14 and has pushed to a fresh all-time high near 7,760.

But there is a catch to this earnings anomaly: almost all of the outsized surprise came from just two companies. Alphabet (GOOGL) reported EPS of $9.11 vs. $2.88 expected, with the result including $98bn of unrealized gains from the revaluation of its equity portfolio. While the exact breakdown is not disclosed, its largest positions include Anthropic, the AI lab behind Claude, and SpaceX (SPCX). Amazon (AMZN) reported $5.75 vs. $1.82 expected, helped by a $53.4bn gain from the revaluation of its Anthropic stake.

Together, the two companies accounted for ~71% of the increase in aggregate S&P 500 dollar earnings since late June. Strip them out, and earnings growth falls to 32%, while the aggregate earnings surprise drops to 10.9%. The underlying picture remains strong even after stripping out the outsized mark-to-market gains. S&P 500 revenue is up 15.3% YoY, the fastest pace since late 2021, with all 11 sectors posting growth.

Earnings are higher across 10 sectors, with Health Care the sole exception after Gilead Sciences (GILD) took a charge against legacy M&A assets. Semiconductors remain the standout, with revenue up 77% and earnings up 135% YoY. Energy earnings have also surged 146%, helped by an average quarterly oil price of $92.55 vs. $63.68 a year ago amid the conflict around the Strait of Hormuz. The margin story is equally striking. S&P 500 net margin has reached 16.9%, the highest since 2009, and still stands at a record 15% excluding Alphabet and Amazon.

The macro backdrop is also turning more supportive for risk assets. With inflation holding steady and July employment coming in unexpectedly weak, markets have sharply repriced the Fed path, effectively cutting the odds of a September rate hike in half. Yet the market would not be truly anomalous if it were not starting to tire of good news. Stocks beating estimates are gaining just 0.4% on average, well below the historical +1% reaction. In other words, upside surprises are increasingly being treated as the baseline. Much of the earnings strength was already priced in, leaving less room for stocks to rerate on beats alone, even as the fundamental backdrop remains supportive. The optimism is also broadening beyond mega-cap stocks.

The Russell 2000 is up 22.3% YTD vs. 9.9% for mega-caps, while small companies are looking ahead with unusual confidence. Just 33% of companies issued negative Q3 guidance, well below the 5-year average of 58%. The paradox for the conservative investor is that the market is actually getting cheaper as it rallies. With the S&P 500 up +13% YTD, forward P/E has compressed from 22.2x at the start of the year to ~20x currently—corporate earnings growth is outpacing price appreciation, creating room for both further upside and broadening of the rally. That kind of momentum would be difficult to derail even with a 25bps rate hike. The real risk is a downward revision to those earnings forecasts, which remain the foundation of the entire rally.

When the party ends, I can't say—but stepping aside from a market like this would be ill-advised even for the conservative investor. At some point expectations may become stretched, but that point hasn't arrived, and passing on opportunities of this kind is a mistake. Long-term exposure to SPDR S&P 500 ETF Trust (SPY) remains the most defensible positioning into mid-August. For those seeking shorter-dated alpha, our analysts' current high-conviction ideas include Dell Technologies (DELL), Hilton Worldwide (HLT), Hyatt Hotels (H), Optex Systems (OPXS), Onto Innovation (ONTO), and Robinhood Markets (HOOD).