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Wall Street’s expectations for first-quarter earnings were already high, and early results are coming in even stronger than anticipated. According to FactSet Research, nearly 90% of S&P 500 companies that have reported have surpassed expectations, compared with an average of 76% over the past decade. On average, aggregate earnings have exceeded estimates by nearly 11%, versus a 10-year average of 7%.
AI investment has helped make technology earnings particularly strong. S&P 500 technology companies that have reported so far grew earnings by 45%, more than twice the pace of the next-best sector.
Results outside the U.S. have also supported a bullish tone. Taiwan Semiconductor Manufacturing Co. described “extremely robust” AI chip demand, while ASML reported better-than-expected results, reflecting strength visible across chip manufacturing equipment.
Investors were preparing for a strong earnings season, but the war in Iran has added uncertainty to markets since early last month. Broadly better-than-expected results suggest the economy may be more resilient to war-related shocks and other risks than Wall Street initially expected.
Analysts have increased their estimates for tech sector earnings by about 5% since the end of January, according to BCA Research—more than any sector other than energy, which is expected to benefit from higher oil prices. BCA also noted that the revisions are widely distributed: “gains remain broad-based, with 80% of Tech stocks seeing positive revisions over the last three months.”
Rising earnings expectations are being supported by Big Tech’s growing investments in artificial intelligence. Bank of America reported that analysts have increased forecasts for capital expenditures at the five major hyperscalers—Alphabet, Microsoft, Amazon, Meta and Oracle—by 25% since the start of the year. The companies are now expected to invest $680 billion this year, up 63% from last year.
Despite strong earnings, the stock market reaction has been less enthusiastic. Bank of America said companies that beat both top- and bottom-line expectations performed about as well as the broader market last week. Historically, stocks tend to outperform the market by about 1.4 percentage points after posting a double beat.
“It’s early, but muted reactions to beats suggests that solid 1Q results alone are insufficient, that big moves on geopolitics have subsumed earnings results, and guidance is more important,” wrote Savita Subramanian, BofA’s head of U.S. equity and quantitative strategy.
Last week’s earnings came as optimism grew that an end to the war in Iran—and the largest oil supply shock in history—may be approaching. The S&P 500 closed at a record high for the third consecutive day on Friday, while the Nasdaq posted its longest winning streak since 1992. Although stocks retreated slightly on Monday, the rebound from recent lows could raise the bar for companies in the weeks ahead.
Even with strong results, experts continue to point to pockets of opportunity, particularly in technology. BCA analysts said the tech sector’s PEG ratio—the forward-looking valuation metric—is the lowest of all sectors and sits in the bottom quartile of its own history.
Ninety S&P 500 companies, representing about 14% of the index’s earnings, are scheduled to report this week. The season peaks next week, when companies accounting for more than 40% of S&P 500 earnings are due to report.
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