S&P 500 Second-Quarter Profit Jumps 31%, Fueling Earnings Surprise

Stronger-than-expected second-quarter earnings from U.S. companies are giving fresh support to New York stocks, which are hovering near record highs.

Bloomberg reported on Aug. 15 that net income for S&P 500 companies rose 31% from a year earlier. Excluding recoveries immediately after recessions, that was the strongest growth rate since Bloomberg Intelligence began compiling the data in 1992.

The gain also handily exceeded Wall Street’s earlier forecast for 23% growth. With more than 90% of S&P 500 companies having reported results, first-half earnings are on pace for their strongest growth since 2021. Nvidia is also due to report later this month, which could further boost earnings growth in technology shares.

Artificial intelligence has been a key driver of stronger profitability. Net profit margins for S&P 500 companies had struggled to rise above 14%, but approached 16% this quarter. Investors see that as a result not only of big tech’s high profitability, but also of AI-driven cost cuts and productivity gains spreading to other industries.

22V Research estimated that AI adoption lifted corporate profit margins by about 1.5 percentage points. Mark Hackett, chief market strategist at Nationwide Financial, said AI had been more of a cost burden over the past five years but has reached an inflection point this year where it is beginning to generate profit.

As earnings have grown faster than share prices, some valuation pressure has eased. The S&P 500’s 12-month forward price-to-earnings ratio has fallen from about 26 at the start of the year to below 22. Profit growth has outpaced the market’s advance even as stocks continued to rise.

Scott Rubner, head of equity and equity derivatives strategy at Citadel Securities, said the market’s rally so far has been driven by corporate earnings rather than multiple expansion.

Even so, investors are becoming more demanding in how they assess AI spending. Their focus is shifting toward companies that can turn AI investment into actual revenue and cash flow, rather than those simply spending heavily on the technology. Amazon and Microsoft, which have monetized AI investment through their cloud businesses, were cited as leading examples.

The earnings strength was not limited to large technology companies. Of the 1,500 U.S.-listed companies that had reported results through Aug. 12, about 75% beat market estimates on both earnings per share and revenue. Among the S&P 500’s 11 sectors, healthcare was the only one to post a profit decline.

Wall Street has also been raising its outlook for equities. The average year-end target for the S&P 500 has climbed to 7,894, implying about 1% additional upside from current levels. Forecasts for full-year earnings growth have also risen to 27% from 15% at the start of the year.

The earnings outlook is improving not only in the U.S. but also in Europe and Asia. Second-quarter profit at European companies rose 18% from a year earlier, the strongest growth since 2022. Earnings forecasts for companies in the MSCI Asia Pacific Index have also been raised by about 10% since June, the biggest improvement for that period since 2009.

Investors are paying close attention to the spread of earnings growth beyond AI and semiconductors into sectors such as financials and industrials. If the stock rally’s engine broadens from a handful of large technology companies to corporate earnings more generally, that could help sustain the current advance.