The war in the Straights of Hormuz with Iran continues. According to the liberal media it is a stalemate where the US is losing. I wonder how that happens when we, as net exporters of oil, goods, services, and technology are capturing greater market share as a result, and there have been very few lives lost. But unfortunately, I cannot give commentary as often and as graphic as what the media sources most followed can. Suffice it to say that when I am in question as to what is “really going on” I simply look at what the money is saying. At present, the money is already preparing for what could happen next should the conflict end.
In the ultimate measure, I truly believe that all valuations of every financial asset is based on economic stability and the ability of companies and broad economies to meet their financial obligations and sustain their population and industries. At present, the US is leading in this measurement. This most recent first quarter of 2026 is nothing but a glorious representation of US economic superiority and therefore market performance.
The old Wall Street adage, “earnings are mothers’ milk of stocks,” feels outdated. I can’t imagine a Gen Zer saying it without a heavy dose of sarcasm. The concept, however, is as true as ever in 2026. Despite the uncertainty around oil prices, lingering tariff concerns, AI creative destruction fears, and the overhang of midterm elections, the S&P 500 is up 10.1% year-to-date as of last week. A big reason is that earnings expectations have soared. The questions from here are whether earnings expectations have peaked and how much of the good news is priced in?
According to FactSet research, this is where the earnings stand after 95% of companies have reported. As can be seen, circled in red, earnings have risen over 13%. 87% of companies (not only AI technology companies) have beaten what analysts have expected. And they have surprised the earnings expectations by an average of almost 17%. THIS IS ON FIRE. Here is the graphic from FactSet of this first quarter:
Rare surge
Consensus estimates are calling for S&P 500 earnings growth of 31.8% in calendar year 26, which would be the fastest since Q2 2022. Growth rates this high are normally reserved for the early days of economic expansions when earnings are rebounding from depressed levels, not in year seven of an expansion. The only cases when GAAP EPS growth has exceeded 30% more than three years into an expansion were in Q2 1988 – Q1 1989 (post 1987 crash), Q2 1994 – Q2 1995 (heading into the internet productivity boom), and Q1 2000 (dotcom bubble peak).
Top-heavy or broad-based?
Since January 28, consensus estimates for S&P 500 operating earnings growth for CY26 have nearly doubled from 12.3% to 23.5%. One of the criticisms of the revisions story is that they have been driven commodity-based sectors and a handful of semiconductor stocks.
While the criticism has merit, estimates have risen for most sectors. The chart below shows consensus growth rates and contributions for S&P 500 sectors. Tech sector earnings are expected to surge 42.9% this year, contributing 13.3% points to the S&P 500’s 23.5% EPS growth (56.6% of the total). While up from the 50.4% that Rob Anderson highlighted, Financials and Health Care are the only sectors with negative earnings revisions since then.
Tech biggest driver, but other sectors adding to EPS growth:
Earnings as a sentiment gauge
Another way to remove the impact of outliers is to look at the median. The median one-year forward estimate for S&P 500 stocks is 12.7% (chart). It remains in a zone where the S&P 500 has risen at a double digit annual rate, on average, but if analysts continue to ratchet up expectations, even median earnings estimates could rise to levels that have been unsustainable in the past.
To take a bit of a step back, the fact that the US economy has stood the test of time even in the face of roadblock after roadblock being thrown at it. The bull market that we have been in really started during the Great Financial Crisis, but the latest portion was notably set off by the massive helecopter drop of money on the world economies during the COVID shutdown. Here are the list of impedements that the markets have overcome since then:
Undeniably this current phase is the result of US exceptionalism in the areas of Energy Generation, and Computer Power. Thomas Lee did a very clear graphic this past week where the US is compared to China, South Korea, Europe, and Latin America from the perspective of population growth of prime wage age, AI & Computer Power, and Energy Independence. As can be seen, we are leading in all of these areas:
This brings me to the points that I have been mentioning for the last few weeks in my reports. Since the bounce has been the best seen in decades, and since there are major statistically significant reasons for impediments to have a very negative impact on this year, I have been more cautious than normal about the possibility of a market correction. None of these impediments have surfaced in a way to derail the current broad market advance. And to the contrary, the Equal Weighted S&P 500 last week actually broke to a new all-time high. Signaling that the advance is actually broadening and taking on more companies and industries breaking to new highs.
What we have noticed that speaks to the needed digestion is one of a “rotational correction.” This is when the money doesn’t want to leave the asset class that it is in (the US Equity market) so instead the index remains elevated, and money moves from one sector to another. This is very different than the broad markets selling off and the money moving to bonds or commodities. This time it appears very clear that the money seems to rotating and doing so in a very organized fashion. This is also very important as it tends to reflect that the information is clear and concise and therefore the movements are not Helter Skelter but instead quite organized. This also allows the market to correct inside itself rather than all sectors declining in a broad-based decline. This is what we have experienced of late:
This does little to give an indication of where the broad markets or each individual sector might go, but it does provide some solace in knowing that a level of digestion truly has occurred and this could give the markets the ability to refuel for a further advance.
As we move into the dog days of summer, I believe that we will begin seeing questioning comments on the ability of the new Fed Chairman Warsh. He actually does have some rather difficult hurdles in front of him, but due to his clearly voiced separation from the White House, it will be interesting to see how he does. These are his challenges as I see them:
Time will tell, but for now, I believe staying the course could be the best course of action. I will continue to monitor the conflicts, the US Dollar, interest rates, and overall inflation measures. But at present, I can’t find a major or insurmountable issue to deal with.
-Ken South, Tower 68 Financial Advisors, Newport Beach
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