US WEEKLY KICKSTART
Q2 2026 mid-season earnings update
- AI stock volatility during the past week has continued to follow the typical historical pattern following sharp Momentum rallies. The sharpest Momentum rallies in recent decades have usually been followed by periods of consolidation similar to the recent drawdown. While earnings will determine the eventual direction of the trade, both history and recent investor deleveraging suggest an improved outlook going forward.
- The Q2 reporting season has indicated continued strength in the earnings underlying the bull market. 61% of S&P 500 companies have reported Q2 results. Of these, 64% have beaten consensus EPS forecasts by at least a standard deviation of estimates, one of the highest levels on record. While the reaction to earnings beats has been lackluster for TMT stocks, the equal-weight S&P 500 has continued to climb alongside steady EPS growth.
- S&P 500 earnings growth in Q2 is tracking above both consensus estimates and realized growth in Q1. S&P 500 EPS growth is tracking at 26% year/year excluding the “other income” from mega-cap tech’s appreciating equity investments. Including those gains, the headline growth rate is 45%. AI infrastructure stocks account for roughly a third of S&P 500 EPS growth in Q2. The median S&P 500 company is on pace to grow EPS by 12% in Q2, above the consensus estimate of 9% coming into the season.
- Q2 results have also catalyzed broad-based upward revisions to 2027 earnings estimates. Since the start of the third quarter, the bottom-up consensus estimate for S&P 500 2027 EPS has been lifted by 1%, with positive revisions in most sectors and positive revision breadth across the S&P 500. The impact of rising input costs on margins remains a key risk.
- Reports from the hyperscalers this quarter signaled rising capex spending and increasing need for external financing but also growing evidence of return on AI investments. The hyperscalers reported $182 billion of capex spending in Q2 alongside $5 billion of free cash flow and $101 billion of debt and equity issuance. Analyst estimates now point to over $1 trillion of capex in 2027, more than $100 billion above estimates heading into the quarter, and capex that will exceed cash flow from operations from 2026 through 2028. Estimates also show continued acceleration in hyperscaler revenue growth following above-consensus cloud growth of 48% this quarter.
The AI trade continues to follow the typical pattern of past Momentum factor rallies, albeit with exceptional volatility. Our long/short S&P 500 Momentum factor has recently registered its highest volatility in the last few decades outside of recession and continued to swing wildly this week. However, both the historical pattern and the sharp deleveraging that has recently taken place among hedge funds and ETF investors suggest rotational volatility should diminish in coming weeks.
While investors debate the long-term earnings implications of the AI boom, the Q2 earnings season so far has signaled continued strength in near-term fundamentals. Among the largest AI infrastructure stocks, while recent estimate upgrades have not been as large as revisions last quarter, earnings estimates have continued to climb. Outside of the AI complex, fundamental outlooks have also remained strong, and share prices have climbed steadily alongside rising earnings.
61% of S&P 500 companies representing 66% of market cap have now reported Q2 2026 results, including most of the mega-cap tech stocks. Nvidia, the largest stock left to report, is scheduled to release earnings on August 26th.
Earnings surprises
Nearly 2/3 of S&P 500 companies have beaten consensus EPS estimates this quarter, one of the highest rates on record. This represents one of the highest frequency of earnings surprises on record, exceeded only by last quarter, the Q3 2025 reporting season, and the COVID reopening period in 2020-2021.
However, the “reward” for earnings beats has been lackluster, particularly within TMT. Within TMT, the median stock beating on EPS has lagged the S&P 500 by 192 bp on the day after reporting, compared with 75 bp of outperformance for the median stock in other sectors. During the last couple decades, the median S&P 500 stock beating EPS has outperformed the S&P 500 by 95 bp on the day after reporting.
Aggregate S&P 500 earnings growth is tracking well above consensus estimates this quarter, even adjusting for non-recurring “other income.” S&P 500 EPS growth is tracking 45% year/year in Q2 compared with a consensus estimate of 22% coming into the quarter. However, 19 pp of that growth is attributable to Alphabet and Amazon’s combined $151 billion of “other income” related to equity investments. Microsoft contributed an additional $3 billion of “other income.” Excluding these gains, S&P 500 EPS growth is tracking at 26%, an acceleration vs. Q1 and the fastest pace of growth since 2021. EPS growth for the median S&P 500 stock is tracking at 12% year/year, also exceeding consensus estimates, which pointed to 9% growth at the start of the season.
“Other income” has recently represented an unusually large share of mega-cap tech earnings. Last quarter, Alphabet and Amazon GAAP net income was boosted by $53 billion of combined “other income,” with $49 billion explicitly stemming from equity stakes in private companies. This quarter, Alphabet reported roughly $98 billion of “other income” driven by unrealized investment gains and Amazon reported $53 billion of “other income” from private investments.
AI infrastructure stocks are expected to account for nearly a third of S&P 500 earnings growth in Q2. Analyst estimates point to AI infrastructure stocks contributing more than half of S&P 500 earnings growth for the remainder of 2026 and in 2027.
Earnings revisions
In addition to strong backward-looking results, Q2 reports have driven continued upward revisions to analyst 2027 earnings estimates. Since the start of Q3, consensus estimates for S&P 500 2027 EPS have been revised up by 1%, with the strongest revisions to Energy and Financials. Broad based upward revisions to 2027 earnings have been reflected in continued positive revision breadth across the S&P 500.
Input cost pressures remain a risk to corporate profitability. Net profit margins for the median S&P 500 stock have remained relatively unchanged during the past several quarters as companies managed headwinds from tariffs and energy prices. While the profitability of the largest tech stocks has continued to lift margins for the aggregate S&P 500, analysts have recently trimmed Q3 margin estimates for most stocks that have reported Q2 results.
AI investment and monetization
Hyperscaler results this quarter showed increasing evidence of return on AI investment in the form of strong revenues. Alphabet, Amazon, and Microsoft each reported above-consensus revenue growth, with cloud revenues rising by 48% year/year in Q2, an acceleration from 39% growth in Q1. Meta reported revenue growth of 28%, in line with consensus estimates. Continuing the trend of the last few quarters, consensus estimates for the group’s future revenues continued to accelerate, with analysts now expecting collective revenues across business segments to grow at an annualized rate of 18% during the next two years.
Estimates for hyperscaler capex in 2026 rose only modestly this quarter but forecasts for spending in 2027 jumped by nearly $125 billion. In previous years, the typical pattern was for moderate capex revisions in the middle of the calendar year. While consensus estimates for 2026 hyperscaler capex have been lifted by a relatively modest $36 billion since the start of the reporting season, 2027 capex estimates have jumped from $929 billion (23% annual growth) to over $1 trillion (33% growth).
Analyst estimates now show hyperscaler capex exceeding cash flow from operations from 2026 through 2028. The need for additional funding has driven an increase in hyperscaler debt issuance and a growing focus of equity investors on corporate credit spreads. Hyperscaler Q2 cash flow statements reported a collective $182 billion in capex alongside $51 billion of debt issuance, $50 billion of equity issuance, and just $5 billion of free cash flow. Equity issuance will likely increase in coming quarters. Likewise, our credit strategists expect the share of hyperscaler capex that is debt-funded to increase in 2027, with the companies issuing approximately $400 billion of IG debt globally next year.
Earnings call commentary from the hyperscalers supported the view that capex spending will continue to be funded with external sources of capital. Below are select quotes from hyperscalers on the topic of debt and equity issuance.
Oracle Corp. (ORCL), June 10: “To support our capital investments program, we expect to raise around $40 billion in debt and equity in our fiscal year 2027, and that includes our already announced $20 billion at-the-market equity issuance. We don’t anticipate raising additional debt funding in calendar year 2026.”
Alphabet, Inc (GOOGL) July 22: “As you’ve seen in our results today, we continue to generate very healthy, strong cash flow from operations. So that’s our first source of funding. And then we look at debt and most recently we did the equity raise. And we have expanded our debt portfolio quite significantly over the past 12 months... But we also want to make sure we have a resilient, not just growth outlook, but also a resilient balance sheet, and a strong balance sheet, healthy balance sheet, which is the rationale behind expanding into the equity markets. At this point, we’re not planning to go back to the equity markets, with the exception of as you recall, part of our equity offering was the ATM or At-The-Market offering that we will do to address the stock-based comp – or the tax on SBC, which we’ll do for some period of time.”
Meta Platforms, Inc (META) July 29: “Our strong operating cash flow certainly has put us in a position of strength as it pertains to funding our infrastructure buildout. But we’ve also been evolving our capital structure in recent years to include a greater mix of debt as we work to bring down our cost of capital. And we have generally found it prudent to continue adding cost-efficient long duration sources of capital as we make investments in initiatives that themselves have long time horizons, especially AI infrastructure projects. We’ve also broadened our aperture there to include partnerships like the one we announced with BlackRock yesterday. And we’ll continue to be thoughtful about evaluating the appropriate different sources of capital over time as we evaluate future projects.”
Amazon.com, Inc (AMZN) July 30: “You’ve seen us issue debt this year. We have a lot of options available to us as we continue to fund this growth that we’re seeing in AWS. So we’ll continue to look at all the options and make the appropriate decision at the right time.”
Earnings season summary
S&P 500 earnings and return forecasts
Pricing as of July 30, 2026, unless otherwise noted.
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