Two accountants broke down this earnings season and found the 'biggest surprise' was how good it's been

S&P 500 companies significantly outperformed expectations in Q2 earnings, with 81% beating revenue forecasts and an aggregate earnings per share surprise of 8.4%, surpassing both five- and ten-year averages. This robust performance, particularly driven by the financial, communication services, information, technology, and consumer discretionary sectors, is largely attributed to the AI boom overpowering concerns related to high tariffs, marking the highest percentage of positive EPS surprises since Q3 2023.

Analysis

The second-quarter earnings season has demonstrated considerable strength across the S&P 500, significantly surpassing analyst expectations. According to FactSet data, 81% of reporting companies beat revenue forecasts, a figure that is also on track to represent the highest percentage of positive EPS surprises since Q3 2023. This performance stands well above both the five-year (78%) and ten-year (75%) averages for EPS beats. The magnitude of this outperformance is notable, with companies exceeding estimates by an aggregate of 8.4%. This robust activity, contributing to an estimated 11.8% year-over-year growth rate for the index, is primarily attributed to a boom in artificial intelligence investment overpowering macroeconomic headwinds from US tariffs, which are at their highest levels since the Great Depression. The outperformance was concentrated in the financial, communication services, information technology, and consumer discretionary sectors. Exemplifying the trend were significant earnings beats from firms like Warner Bros. Discovery ($0.63 EPS vs. -$0.24 consensus) and Coinbase Global ($5.14 EPS vs. $1.19 consensus).

Key Decisions for Investors

• Given the broad-based earnings strength and the dominance of the AI theme, investors should consider maintaining or increasing exposure to the S&P 500, with a particular focus on the outperforming technology, communication services, and consumer discretionary sectors.
• The significant margin by which companies are beating consensus (8.4% aggregate surprise) suggests analyst estimates may be overly conservative, potentially signaling further upside if this trend of underestimation persists in subsequent quarters.
• While market sentiment is positive, the underlying risk from high tariffs should not be dismissed; investors must monitor trade policy and its economic impact, as this remains a key headwind that could disrupt the current narrative.
• The exceptional earnings beats by individual companies like WBD and COIN highlight opportunities in bottom-up stock selection; it may be prudent to screen for firms with a high probability of delivering positive earnings surprises, especially those benefiting from secular growth trends like AI.