Will Strong Earnings and Favorable Inflation Readings Boost U.S. Equities?

The S&P 500 is concluding a robust Q2 earnings season, with EPS growth reaching 11.8% and 81% of companies beating expectations, leading to rare upward revisions for Q3 and CY 2025 estimates, particularly in tech and other key sectors. This strong corporate performance, combined with a cooler-than-expected July CPI reading that significantly increases the probability of a September Fed rate cut to 91%, creates a favorable environment for U.S. equities into year-end. Investors are also anticipating upcoming retail earnings for consumer insights and noting outlier reporting dates for certain companies like Agilent and Synopsys, which may signal negative news.

Analysis

The S&P 500 is experiencing a robust Q2 earnings season, with blended year-over-year EPS growth reaching 11.8% and an impressive 81% of companies surpassing both revenue and earnings expectations, a rate well above historical averages. This strength has prompted a rare upward revision in forward-looking estimates, with analyst expectations for Q3 EPS growth now at 7.2% and CY 2025 growth lifted to 10.3% from 8.9%. The momentum is largely driven by the Technology sector (XLK), which has surged 49.1% since the April 8 low, significantly outpacing the broader index. This positive corporate fundamental backdrop is complemented by a favorable macroeconomic development: a cooler-than-expected July CPI reading of 2.7% has increased the probability of a September Federal Reserve rate cut to 91%. While the overall outlook is strong, upcoming earnings from retailers such as Tapestry and Birkenstock will provide a crucial read on consumer health. Additionally, academic research on earnings date timing suggests potential negative news from Agilent Technologies (A) and Synopsys (SNPS), which have confirmed later-than-usual reporting dates, whereas MongoDB's (MDB) advanced date signals potential positive news.

Key Decisions for Investors

• Given the combination of strong corporate earnings growth and a high probability of a September Fed rate cut, investors should consider maintaining or increasing exposure to US equities, particularly in outperforming sectors like Technology (XLK).
• Monitor upcoming earnings from major retailers to gauge the health of the US consumer, as this will be a key determinant for the performance of the Consumer Discretionary sector (XLY) into year-end.
• Investors should review positions in Agilent (A) and Synopsys (SNPS) for potential downside risk ahead of their delayed earnings releases, while noting the advanced reporting date for MongoDB (MDB) as a potentially bullish signal.