As we move into the start of the second quarter earnings announcement season later this week, we are locked and loaded for another great earnings announcement season. After all, the second quarter was the best-performing quarter for both the NASDAQ Composite and the S&P 500 in the past six years, so expectations remain high, since economic growth is clearly accelerating. My favorite economist, Ed Yardeni, pointed out we are in the midst of a FOMO (Fear of Missing Out) market, and industry analysts are estimating the S&P 500 will post 26.1% annual earnings growth for 2026 and then +17.8% for 2027.
Since fundamentally superior stocks in our portfolio are not appreciating as fast as their underlying earnings, their price/earnings (P/E) ratios are being compressed. The stock market should be strong this summer due to wave after wave of positive earnings announcements in upcoming weeks – and the rest of this year. Also, due to rising household wealth for the 50% of Americans in the stock market, some of this “wealth effect” is expected to filter down and help boost prosperity for all Americans, as the velocity of money increases.
Here are the most important developments recently and what they mean:
- A good omen for the earnings season is that WD-40 surged in the wake of a 43.1% earnings surprise, so good earnings announcements are clearly being rewarded. Another great omen is that Taiwan Semiconductor Manufacturing (TSM) announced that its June sales soared 67.9% in June to a record $13.99 billion. TSM’s June sales rose 6.2% compared to May and were 1.1% higher than analysts’ consensus expectation. These strong sales for TSM bode well that the AI-related stocks, like semiconductors, are now more likely to continue to post sales and earnings in excess of analyst estimates. Naturally, the AI-related stocks and data center stocks are also expected to post strong guidance, especially pertaining to their order backlogs. TSM will announce its second quarter results on Thursday. The analyst community is expecting 35% annual sales growth and 48% earnings growth, but due to TSM’s accelerating sales, I am expecting the company to post better-than-expected sales and earnings.
- There is no more talk about the Fed raising key interest rates in the wake of the CPI report. The June Consumer Price Index (CPI) came in better than economists expected and posted a 0.4% decline, which is the first time the CPI declined since 2020. Although food prices rose 0.2% in June, energy prices declined, led by a 9.7% drop in gasoline prices. Owners’ equivalent rent (shelter costs) rose 0.2% in June, which was substantially lower than in previous months.
- Wholesale inflation is also moderating. The Producer Price Index (PPI) declined 0.3% in June, which was better than economists’ consensus estimate of a 0.2% decline. The core PPI, excluding food, energy and trade services, rose 0.1% in June. Wholesale food prices declined 0.4% in June, while energy prices declined 6.4%.
- Retail sales will be announced on Thursday. Economists are only expecting retail sales to rise 0.2% in June, so a big surprise is possible, especially since retail sales surged 0.9% in May. There is no doubt that consumer spending is improving, especially in light of the stock market’s second quarter performance. So, the only real question is: are we still in a “K-shaped” recovery in consumer spending led by the Baby Boomers with stock market exposure, or is consumer spending also improving with lower income folks as well?
In summary, the analyst community is expecting the S&P 500’s second quarter earnings to rise 22%, but due to wave after wave of positive analyst earnings revisions, expectations are high for much stronger underlying earnings. Typically, positive analyst earnings revisions precede earnings surprises. Energy-related stocks are forecasted to post the strongest earnings, followed by information technology and semiconductors, then material stocks. Only these three of the 11 S&P 500 sectors are forecasted to post stronger second quarter earnings than the overall S&P 500, so we still remain in a relatively narrow stock market environment.
