Investors have faced no shortage of uncertainty lately, from geopolitical developments and rising bond yields to inflation concerns and shifting policy expectations. Despite that backdrop, markets have remained resilient. The S&P 500 ended last week at an all-time high and is up more than 13% this year, while the equal-weighted S&P 500 has gained nearly 15%, suggesting market strength has extended well beyond the largest technology and artificial intelligence companies.
One important reason for that resilience is the continued strength of corporate fundamentals.
Earnings Continue to Surprise
With nearly 90% of companies having reported results this earnings season, approximately 86% have exceeded earnings expectations. Eight of the S&P 500's 11 sectors have also delivered double-digit earnings growth over the past year.
Overall earnings growth has reached roughly 50% from a year ago, the strongest pace since 2021 and about twice what investors expected before reporting season began. However, that headline figure deserves some context.
Alphabet and Amazon reported approximately $98 billion and $53 billion, respectively, in gains related to changes in the carrying value of investments in private companies. Those gains contributed substantially to reported earnings but largely represent changes in valuations rather than additional cash generated by the businesses.
Excluding the impact from Alphabet and Amazon, S&P 500 earnings growth falls to approximately 32%. While significantly below the headline figure, growth above 30% still points to considerable underlying strength across corporate America.
Revenue and Profit Margins Add to the Strength
The positive picture isn't limited to earnings. S&P 500 revenues are up approximately 15% from a year ago, with every sector reporting positive revenue growth.
The broader economy has helped provide a supportive environment. Nominal GDP, which incorporates both real economic growth and inflation, grew at approximately an 8% annualized pace during the second quarter.
Companies are also converting more of their revenue into profits. S&P 500 operating margins reached a record 18% during the second quarter, approximately four percentage points above pre-pandemic norms. The combination of rising revenues and historically strong margins has translated into exceptional earnings growth.
Fundamentals Versus Headlines
Geopolitical risks, tariffs, inflation and interest rates still matter. The key question for investors is whether those developments create temporary market volatility or become significant enough to alter the underlying fundamental picture.
So far, corporate fundamentals remain healthy. That doesn't mean markets will move higher without periods of volatility. Rather, it highlights the distinction between headlines that can move markets from day to day and the fundamentals that tend to drive investment outcomes over longer periods.
For long-term investors, that reinforces the importance of maintaining diversified portfolios and making investment decisions based on evidence and underlying fundamentals rather than reacting to short-term noise.
Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
EP Wealth Advisors offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.
Disclosures:
Video Transcript:
Adam Phillips:
Hi, everyone.
Investors have had plenty of headlines to digest lately—from ongoing developments in the Middle East to rising bond yields, inflation concerns, policy uncertainty…the list goes on.
And yet, markets have continued to hold up remarkably well. The S&P 500 ended last week at an all-time high and is up more than 13% this year.
And this hasn't just been an AI-driven rally. The equal-weighted S&P 500—which gives every company the same influence on the index—is up nearly 15% this year, suggesting the average stock is participating as well.
A big part of that resilience comes back to fundamentals.
Markets can look through a lot of short-term noise when corporate earnings, revenues and profit margins remain healthy. And that's exactly what we're seeing this earnings season.
We're now nearly 90% of the way through this reporting season, and about 86% of companies have beaten earnings expectations. Perhaps even more impressive, eight of the eleven sectors in the S&P 500 have delivered double-digit earnings growth over the past year.
Overall, earnings are up roughly 50% from a year ago—the strongest growth we've seen since 2021 and roughly double what investors expected before the reporting season began.
But there's an interesting wrinkle in that number.
Alphabet and Amazon reported roughly $98 billion and $53 billion, respectively, in gains from changes in the carrying value of investments in private companies such as Anthropic, OpenAI and SpaceX.
These were largely gains on paper—not $150 billion of additional cash coming through the door.
And because those valuations can move in both directions, what boosts earnings today can potentially become a headwind tomorrow.
If we strip out the impact from Alphabet and Amazon, S&P 500 earnings growth falls from roughly 50% to closer to 32%.
That sounds like a big adjustment—and it is—but I actually think it reinforces the larger point:
Even after removing those gains, corporate earnings are still growing more than 30%.
And the strength extends beyond earnings.
Revenues are up about 15% from a year ago, with every sector of the S&P 500 reporting positive revenue growth.
One reason is the strength of the economy in nominal terms—which includes both real growth and inflation. Nominal GDP grew at roughly an 8% annualized pace during the second quarter, providing a strong backdrop for corporate revenues.
And companies aren't just generating more revenue. They're also keeping more of it.
S&P 500 operating margins reached 18% during the second quarter—a record and about four percentage points above pre-pandemic norms.
So put those pieces together:
Revenues are growing, companies are converting more of those revenues into profits, and that's translating into exceptionally strong earnings.
And I think that's an important reason markets have been able to look through so much of the noise lately.
That doesn't mean geopolitical risks, tariffs, inflation or interest rates don't matter. They do.
The question for markets is whether those developments create temporary volatility or become significant enough to change the fundamental picture.
And so far, corporate America continues to provide a pretty strong foundation.
None of that guarantees markets will move higher in a straight line. They never do.
But for long-term investors, it's a useful reminder that the headlines that move markets from day to day and the fundamentals that drive them over time aren't always the same thing.
That's why we try not to make long-term investment decisions based on short-term noise. We stay focused on the underlying fundamentals, maintain diversified portfolios, and make adjustments when the evidence—not simply the headlines—suggests the environment has meaningfully changed.
Right now, the fundamental picture remains healthy.
I’ll leave it there for now. Thanks for joining us, and we'll see you next week.
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