2Q earnings season begins next week with major banks reporting and a broad set of indicators points to another strong season. The macro regime remains constructive. Corporate guidance has improved materially, rebounding from a deterioration earlier this year. Nearly half of companies are raising guidance and the share guiding lowering is at one of the lowest levels on record.
AI trends remains the key thematic focus. Tech continues to lead positive guidance, reflecting sustained strength in AI-related demand. The broader AI universe has delivered improving EPS and sales beat rates over the past two quarters, and investors also rewarded AI companies more aggressively during the last earnings season. Although recent weakness in high-Momentum AI stocks has raised questions about positioning, another quarter of strong fundamentals could help stabilize sentiment and support the recent pullback.
Beyond AI, improving earnings trends among small caps remain an important theme as well. Small cap earnings have made a relative recovery since late last year. Quarterly earnings revision for small caps are stronger than for other indices now. At the same time, profit margins remain highest among large-cap companies, driven by hyperscalers, but mid- and small-cap margins are improving.
Our earnings screen for next week’s S&P 500 reporters highlights companies with the strongest beat potential based on Earnings Quality and Earnings Sentiment, while also identifying names with elevated miss risk.
2Q Earnings Outlook: Banks will kick off 2Q earnings season next Tue. As we discussed (HERE), earnings are expected to be strong as macro backdrop remains Normal. The guidance ahead of 2Q has continued to rebound after a sharp drop in 1Q. 44.4% of S&P 1500 companies are raising the guidance and only 13.6% are guiding lower.
2Q earnings could be a potential catalyst for a reversal of the recent volatility on Momentum names, which are highly concentrated in Tech. For now the percent of companies increasing guidance fall into Technology the most, which is the most AI driven sector. There is a macro risk to high Price Mo to keep in mind heading into next week. IF CPI/PPI data this week are too strong, discounting of tighter policy would weigh heavily on Price Mo names (HERE).
One major focus in 2Q has been the fundamental trends within the AI theme. Within the MSXXAI universe, which includes broad AI related names, fundamentals have beat expectations over the past two quarters. Both EPS and sales beats rates were stronger than the rest of the S&P 1500. The sales beat rate in 1Q was >95%.
The market also rewarded AI names in 1Q. EPS beats within AI saw higher excess returns and misses fell less than for the rest of the S&P 1500. As AI performance came under pressure since late June, we are not sure if the optimistic reaction towards their earnings will extend into 2Q, but AI fundamentals beating estimates again should help relieve some of the recent pull back from high Momentum AI names.
In addition, small caps have rebound to outperform large caps since 4Q last year (HERE). The rebound of small cap earnings is an important long-term support. Though year end estimates growth for small caps are still lower than that of large caps, quarterly earnings revision for the index are higher than for mid and large cap names, which is unusual. If revisions remain strong, that will be a support for small cap names.
Currently, large cap margins remain well above SMIDA caps. Hyperscalers margins are particularly high. That noted, small and mid caps profitability have improved as well.
Below we list the 31S&P 500 names reporting next week. Names highlighted in green (high Earnings Quality + positive Earnings Sentiment) have greater beat potential, and names in red (high Earnings Turbulence + negative Earnings Sentiment) have higher miss risk.
