AI Powers Broad-Based Earnings Beat in Q2
As the second-quarter earnings season winds down, the numbers are unequivocally strong. With just under 90% of S&P 500 companies having reported, roughly 80% posted positive year-on-year earnings-per-share (EPS) growth. According to Bank of America research, this places the quarter in the 94th percentile for EPS breadth—a signal of remarkably broad corporate health.
Historical Context: A Rare Streak
Those results, combined with Wall Street consensus forecasts for Q3 and Q4, put the index on track for four consecutive quarters of EPS growth exceeding 20%. BofA strategists note this phenomenon has occurred only 10 times since 1936. The median AI-related stock notched 28% EPS growth, while the median non-AI stock managed just 12%. “Even so, AI remained the index’s primary growth engine,” wrote the team led by Savita Subramanian.
Concentration Risk: The S&P 493 Problem
Apollo Global Management’s Torsten Sløk highlighted a critical divergence: profit margins have surged steadily in the tech sector, but have been flat everywhere else. “The AI capex boom is so far only showing up in the sellers’ margins, not the buyers’,” Sløk wrote. He warned that the longer it takes the “S&P 493” to generate ROI on AI investments, the greater the downside risk to an economy and market this concentrated in a single theme.
Wall Street Still Optimistic, But Cautious
JPMorgan Chase’s equity strategy team, led by Dubravko Lakos-Bujas, raised their year-end S&P 500 target to 8,000 from 7,800—implying roughly 3% upside from Friday’s close. Their note emphasized that the “earnings picture remains strong and broad-based across multiple sectors,” with hyperscaler capex guidance remaining the key theme. AI spending, primarily from hyperscalers, is now expected to hit $900 billion by year-end—roughly 59% of total S&P 500 expected capex of $1.5 trillion.
Good News Already Priced In?
Yet BofA strategists flagged a warning: companies beating EPS and sales estimates saw next-day outperformance of just 0.8 percentage points—barely half the historical average. This suggests “much of the good news was already priced in,” especially in tech. For hyperscalers, the pressure is dual: maintain aggressive capex to signal demand strength, while delivering tangible ROI to satisfy increasingly impatient investors.
FAQ
What percentage of S&P 500 companies reported positive EPS growth in Q2?
Roughly 80% of S&P 500 companies that have reported Q2 earnings showed positive year-on-year EPS growth, placing the quarter in the 94th percentile for this metric historically.
How much is AI spending expected to reach by year-end 2026?
AI spending, primarily from hyperscalers, is expected to rise to $900 billion by year-end, representing roughly 59% of total S&P 500 expected capital expenditures of $1.5 trillion.
Why are strategists concerned about 2027 EPS deceleration?
While consensus expectations remain strong for Q3 and Q4 2026, EPS growth is projected to decelerate in 2027. Historically, years of above-trend but slowing EPS growth typically produce weaker equity returns, and the market’s heavy concentration in AI increases downside risk if ROI fails to materialize broadly.
