2Q26 Earnings Learnings: Raise S&P 500 PT & EPS, Yet Again

• Strong headline numbers with Tech once again leading the way. While S&P 500 headline EPS printed an extraordinary 50%+ Y/Y this quarter, excluding one-time items still leaves aggregate EPS up 29.3% Y/Y, impressive by any measure. Sales growth came in at a solid 13.3%. Big Tech delivered a robust 35% EPS growth, up from 30% last quarter, while the rest of the Tech sector posted 88% Y/Y EPS growth and 14.5% EPS surprise as chip demand spiked. Tech operating margins also expanded to 35% from 28% a year ago.
• A clean season, but reactions were muted. 86.2% of companies beat consensus estimates, well above the 75% long-run median (since 1998). Beat-and-raise dominated, with FY26 consensus up +17.5% YTD. Margins are expanding Y/Y, especially in Financials, TMT, Industrials, and the consumer complex (many likely benefiting from IEEPA tariff refunds). Yet markets still penalized misses much more heavily than they rewarded beats this quarter, suggesting a high hurdle rate at current valuations given elevated and rising yields.
• We raise our FY26 EPS estimate to $365 from $337 and our FY27 EPS estimate to $414 from $389. Following stronger-than-expected 1Q26 and 2Q26 earnings seasons, broad-based earnings momentum remains intact, supported by continued Tech beat-and-raise, durable AI demand, and a firm industrial backdrop. While a potentially higher-rate environment and softer consumer spending present incremental challenges, we believe earnings resilience remains sufficient to offset macro crosswinds.
• We raise our YE26 S&P 500 price target to 7950 from 7800, and we keep our YE27 S&P 500 price target at 8800. While our earnings outlook has improved, we remain conservative on valuation amid resilient inflation, geopolitical uncertainty, a more hawkish rate outlook, and questions around funding cost and durability of AI capex. As a result, we believe earnings should drive the majority of the upside in our targets, rather than multiple expansion.
• We downgrade our view on the Utilities sector to Neutral, from Positive. While NTM P/E for the sector has come in materially and Utilities are now trading at a wider-than-average discount to the S&P 500, we believe that recent regulatory challenges (including failure to advance meaningful wildfire liability reform in California, and bipartisan pushback against data center permitting in several US states) will remain an overhang on the sector from a relative return standpoint. This leaves us Positive on TMT and Industrials, Negative on the Consumer complex, and Neutral on the remaining sectors.

2Q26 Earnings Learnings

• S&P 500 revenue and EPS growth came in at 13.3% and 29.3% (the latter excluding one-time items), respectively, both ahead of expectations (average surprise: 3.6% on sales, 25.9% on EPS) and long-run medians.
• Breadth of surprise stayed flat Q/Q after an exceptionally strong 1Q26 but improved significantly Y/Y. 86.2% of companies beat the consensus estimate, comparable to 86.8% last quarter and up from 82.1% a year ago. Depth of surprise improved both Q/Q and Y/Y with a 25.9% surprise, up from 15.7% a quarter ago and 7.9% a year ago.
• Tech continues to deliver standout beat-to-miss ratios, with Healthcare and Energy also showing strength, while Real Estate and Utilities lagged.

• Communication Services and Consumer Discretionary led other sectors in EPS surprise (thanks in large part to GOOGL and AMZN), while Real Estate and Materials delivered mid-single-digit beats.
• This quarter, investors continued to penalize earnings misses, while responses to earnings beats remained muted. Upside price responses to beats were far below historical averages, suggesting limited incremental reward for positive surprises, while downside reactions to misses were sharper and exceeded historical norms.
• Both Tech and ex-Tech segments posted their strongest EPS surprises in a year with Big Tech leading the way. Within our Big Tech cohort, GOOGL and AMZN drove the bulk of the upside EPS surprise, though META missed expectations this quarter.

Above-Trend EPS Growth Expanded Across More Sectors This Quarter

• Big Tech's EPS growth remains strong at 35% Y/Y, well above the LT median and up from last quarter's 30%. EPS growth for the rest of Tech (88% Y/Y) also came in well above LT trend levels, with improvement both Q/Q and Y/Y. SPX ex-Tech similarly outperformed its LT median and improved Q/Q and Y/Y, even though negative growth in Healthcare and Real Estate weighed on the results.
• Operating profit margins improved Y/Y across most sectors, but were flat to down in Healthcare and Materials. Tech and Energy's margins expanded meaningfully, rising to 35% from 28% and 18% from 12%, respectively, in the year-ago quarter. Y/Y margin expansion in Tech, Industrials, and the consumer complex were likely helped by IEEPA tariff refunds, considering these were among the sectors most impacted by the implementation of the tariffs prior to SCOTUS' decision to invalidate them in February 2026.

Consensus FY26 EPS revised higher, as was hyperscaler capex

• Thanks to two strong earnings seasons, Street consensus for SPX FY26 EPS has been revised sharply higher since the beginning of the year. Revisions are running around three standard deviations above the 10Y average by this time in the calendar year. Of note, full year EPS targets in late May still tended to be an underestimate of actual EPS over the last 10 years.
• Semis, Internet, and Oil & Gas are contributing most to the improved EPS outlook. Biotech was the biggest drag on YTD revisions.
• Meanwhile, hyperscaler capex continues to accelerate, with Barclays analysts forecasting spending to exceed $1.1 trillion in 2027, representing a robust 67% Y/Y increase. Growth is expected to moderate in 2028, though spending is still projected to rise by approximately 30%. GOOGL and AMZN are expected to be the largest contributors, with META close behind.

Relative P/Es most extended for Industrials and Comm. Svcs., least for Big Tech

• NTM P/Es have been choppy YTD. Among sectors where we have a Positive view, Big Tech is trading at a wider-than-average discount versus the S&P 500. By contrast, Healthcare is trading at a wider than average premium to S&P 500 P/E as Biotech posted negative FY26 EPS revisions.
• At 23.7x NTM EPS, Big Tech has been derating over the past month as rate hike debates and AI-linked capex financing raise investor concerns. However, as spending continues to cascade through semis, hardware, networking, and cloud, we continue to favor the secular growth story.

Raise FY26 EPS estimate to $365 from $337, PT to 7950 from 7800

The broad-based strength of 2Q earnings suggests that recent momentum is more than a one-quarter phenomenon. AI remains central to earnings durability: demand continues to outstrip supply, with Big Tech again demonstrating its ability to convert infrastructure investment into earnings upside. While market focus remains on the cost of capital, the AI ecosystem itself is also evolving, as new compute financing structures and leasing-style funding models potentially alleviate some concerns around hyperscaler balance sheet strain while extending the visibility of the secular investment cycle.

To be fair, it is not a clean read all around. The policy backdrop has become incrementally more challenging, with Barclays economists now arguing that September and December tightening remain plausible outcomes. The market is increasingly viewing a higher yield as a constraint on valuation, particularly for longer-duration assets. While the AI buildout continues to support earnings resilience, its increasingly long-duration profile reinforces our decision to recognize strong earnings while keeping valuation assumptions conservative.

Against this backdrop, we raise our FY26 S&P 500 EPS estimate to $365 from $337 and our FY27 estimate to $414 from $389. Since our last update, two developments argue for higher earnings estimates: first, both 1Q26 and 2Q26 earnings seasons confirmed continued earnings momentum, with Tech once again delivering broad-based beat-and-raise and AI-related demand translating into meaningful upside revisions; second, the industrial side of the economy remains supportive, with our economists' forecasts pointing to a firmer production backdrop into next year. We expect these positives to be partially offset by softer consumer spending trends, but not enough to derail what remains a durable earnings expansion driven by AI investment, industrial activity, and still-supportive nominal growth. Around our base case of $365, we estimate a bull/bear range of $370/$360, underscoring the uncertainty around the durability of Tech beat-and-raise alongside the sustainability of the resiliency of current macro conditions, as markets rekindled debates around rate hikes.

We also raise our year-end 2026 S&P 500 price target to 7950 from 7800 and keep our 2027 target at 8800. While our earnings outlook improves meaningfully, our valuation assumptions remain deliberately conservative. For FY26, our SOTP framework assigns a 23.0x multiple to Big Tech, 22.0x to the rest of the Tech sector, and 21.0x to the remainder of the index, reflecting continued confidence in earnings growth but greater uncertainty around the ultimate scale, funding structure, and monetization timeline of the AI infrastructure buildout. The introduction of compute financing vehicles and broader capital participation in AI infrastructure supports the durability of the investment cycle, but recent hawkish shifts in Fed expectations argue against a more aggressive multiple expansion. The result is that earnings do most of the heavy lifting in our target increase. Our 2026 bull and bear cases are 8350 and 6750, respectively, while our 2027 bull and bear cases are 9800 and 7800, reflecting the wide range of potential outcomes around AI monetization, capital intensity, and the eventual path of policy rates.

We downgrade our view on the Utilities sector to Neutral, from Positive. While NTM P/E for the sector has come in materially and Utilities are now trading at a wider-than-average discount to the S&P 500, we believe that recent regulatory challenges (including failure to advance meaningful wildfire liability reform in California, and bipartisan pushback against data center permitting in several US states) will remain an overhang on the sector from a relative return standpoint. This leaves us Positive on TMT and Industrials, Negative on the Consumer complex, and Neutral on the remaining sectors.