As the second-quarter earnings season kicks off, US equity markets are hovering near record highs, buoyed by optimism that many now hope will be validated by incoming corporate results.
Yet expectations for earnings are subdued. Analysts forecast a modest 2.5% year-on-year rise in S&P 500 profits for Q2, making it the weakest earnings season since mid-2023, according to Bloomberg.
Despite recent market strength, the broader outlook has dimmed.
Six of the S&P 500’s 11 sectors are expected to report profit declines.
The full-year growth forecast for the benchmark index has dropped to 7.1%, down from 9.4% in April.
Still, the lowered bar may work in the companies’ favor as the companies can beat the low expectations, said market experts.
Kevin Gordon, senior investment strategist at Charles Schwab, told Bloomberg that the emphasis will be on gross margins to understand the effect of gross margins.
The earnings season unofficially begins Tuesday, with key reports from JPMorgan Chase, Citigroup, and BlackRock.
Other high-profile companies such as J.B. Hunt and Netflix are also set to release results in the coming week.
AI spending dominates big tech outlook
While macroeconomic uncertainty and trade concerns loom, US tech giants continue their aggressive push into artificial intelligence.
Microsoft, Meta, Amazon, and Alphabet are projected to spend approximately $337 billion in capital expenditures in fiscal 2026, up from $311 billion this year, according to Bloomberg.
These investments reflect confidence in AI’s long-term value.
In Q2, the “Magnificent Seven” — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla — are expected to post a combined 14% rise in profits. In contrast, the rest of the S&P 500 is forecast to see a slight decline of 0.1%.
AI hyperscalers alone spent more than $80 billion in the first quarter of 2025 and are on track to hit $300 billion in collective spending over the next year, further cementing their role as growth engines.
Trade tensions and currency moves add complexity
Despite earlier fears, the impact of President Trump’s tariff policies has yet to fully show in corporate earnings.
According to Bloomberg, net income margins for the S&P 500 are likely to dip to their lowest level since early 2024, though this may be temporary.
Margins are projected to rebound in the coming quarters, assuming cost-cutting or AI efficiency gains materialize.
Across the Atlantic, European firms face more immediate challenges.
A Citigroup index shows consistent earnings downgrades since mid-March, with automakers and miners particularly affected.
A stronger euro — up 13% against the dollar this year — could further pressure export-driven firms.
Back in the U.S., the dollar’s decline is providing a quiet tailwind for multinational companies.
Down 10% year-to-date, the dollar has posted its worst first-half performance since 1973.
Morgan Stanley’s David Adams said the weak currency should support earnings, especially for large-cap firms with significant foreign exposure.
As Lisa Shalett of Morgan Stanley concluded, “It’s a good market for some but not all.”
In a low-correlation, stock-picker’s environment, identifying winners amid mixed earnings may be key to navigating the months ahead.
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