All Gas, No Brakes: Profits Soar in Q2
In a solid earnings season, we’d generally expect S&P 500 companies to deliver double-digit profit growth, meaning earnings growth of at least 10% versus a year ago (20% tops). That’s not a hard-and-fast rule, but it provides a useful benchmark for evaluating the strength of a quarter.
Eight of the last nine quarters have exceeded that hurdle. What’s unusual: Q1 approached 30%, the best reading since 2021 Q4. With almost 90% of firms having reported Q2 profits, earnings are up about 50%, according to FactSet.
It’s not unusual to see remarkable profit growth when the economy is exiting a recession because year-over-year comparisons are easy. For example, the 2021 Q1 results are being compared with 2020 Q2, the bottom of the Covid Recession, when portions of the economy simply stopped.
It is, however, remarkable to see Q1’s and Q2’s surge in profits this late in an economic expansion, when annual comparisons are much more difficult.
In fact, the current projection for Q2 is more than double the average analyst forecast when reports began to trickle out in early July. Not surprisingly, the AI boom is playing a big role, as soaring profits from large tech companies and businesses benefiting from AI continue to drive overall earnings growth.
Investors should keep in mind, however, that part of the surge reflects one-time gains tied to equity stakes in companies such as Anthropic and SpaceX (SPCX $133). Those gains may not offer the same support in future quarters.
For example, according to FactSet, Amazon.com (AMZN $274) included non-operating, pre-tax income in Q2 of $53.4 billion, primarily from investments in Anthropic.
Alphabet (GOOG/GOOGL $353/$354) also reported an unusually large earnings surprise that included a net gain of $98.0 billion, primarily due to unrealized gains on equity securities.
Pull these out, and profit growth would be about 30%, according to FactSet. Nonetheless, that’s still impressive. Even more telling, an impressive 88% of companies have exceeded profit forecasts, another indication that Q2 has been an exceptional earnings season.
At a time when investors are cautiously eyeing higher bond yields, Q2’s upbeat results have been a significant support for stocks, with both the Dow and S&P 500 setting new highs last week.