The Big Picture

Briefing.com Summary:

*A lowered earnings bar sets the stage for widespread Q2 earnings beats.

*The market's premium valuation is riding on the guidance heard from the mega-cap stocks.

*The market is priced for positive outcomes on all fronts, which is why there is little room for reporting error.

The second-quarter earnings reporting period is upon us, and, well, what a difference a quarter makes.

Heading into the first-quarter earnings reporting period in mid-April, the world was awash in growth concerns linked to the D.O.G.E. cost-cutting campaign in the U.S., President Trump's reciprocal tariff announcements, and a cold trade war with China.

There was ample concern that companies would either be slashing their full-year guidance or pulling their full-year guidance, citing a lack of visibility. There was some of that, but it wasn't the universal message.

As it turned out, the first quarter results were much better than expected, and the guidance, which many companies still gave, was much better than feared. The added benefit is that it also coincided with the D.O.G.E. effort fading into the background, the president declaring a 90-day pause on the reciprocal tariff rates, and the U.S. and China thawing out their trade relationship.

Bingo, presto, bammo... the S&P 500 and Nasdaq Composite hit new record highs, rallying as much as 30% and 40%, respectively, from their April 7 lows. Ironically, they did so as second-quarter earnings estimates got slashed.

According to FactSet, the blended second-quarter earnings growth rate for the S&P 500 stands at 4.6% today versus 9.2% on March 31. Cue the second-quarter earnings beats.

A Few Questions

The earnings bar has been lowered, and there is no reason to think, if history is any precedent, that it won't be hurdled. The only question is, by how much? Okay, maybe that isn't the only question. The other pressing question is, what will the guidance look like?

The table below shows the blended growth estimate for the second quarter for the 11 S&P 500 sectors and the blended growth estimate for the third quarter based on FactSet consensus estimates.

For the second quarter, two sectors—information technology and communication services—will be largely responsible for the earnings growth. Those sectors house Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Alphabet (GOOG), Meta Platforms (META), and Netflix (NFLX).

Room to Run

Although second-quarter earnings per share estimates have been revised lower, the forward twelve-month earnings per share estimates have been revised higher. That estimate bottomed at $275.08 on April 24, and it sits at $281.64 today.

A weaker dollar, the persistence of a generally solid labor market, the framework trade agreement between the U.S. and China, the rollback in tariff rates, an expectation of lower interest rates, and the passage of the "One Big, Beautiful Bill" contributed to the inflection point.

And what an inflection point it has been for the market. A fear of recession quickly got supplanted by renewed growth optimism, which in turn took some foreboding thoughts about the earnings outlook and turned them into a ray of sunshine. That has been a significant catalyst for the recovery rally.

But herein lies another question. Has the market, at 22.3x forward twelve-month earnings, a 21% premium to the 10-year average, already priced in the good earnings news? We would posit that, yes, it has, which is why the guidance during the June quarter reporting period will be key.

There is room to run for companies that raise their guidance, room to consolidate for companies that reiterate their guidance, and room for sharp declines for companies that lower their guidance. What that means for the stock market will depend in large part on what companies are sending those messages.

It is one thing if Helen of Troy (HELE), a small-cap consumer products company, cuts its guidance, and quite another if NVIDIA (NVDA) disappoints with its guidance. The messaging risk and/or opportunity for the stock market is the same as it has been for more quarters than we can count, and it resides with the mega-cap stocks.

That's just a fact for a market cap-weighted index that has a small cohort of stocks (NVDA, MSFT, AAPL, AMZN, GOOG, META, AVGO, TSLA, BRK.B, and LLY) accounting for approximately 40% of its total market capitalization.

Where they go, the market cap-weighted S&P 500 will follow. That could mean good things, but at this juncture we see a better risk-reward dynamic for passive investors in the equal-weighted S&P 500, which also has a less demanding valuation at 17.1x forward twelve-month earnings, a slight premium to its 10-year average of 16.5x.

Briefing.com Analyst Insight

Companies were given a pass of sorts in the first quarter reporting period when it came to guidance, because everything then was so opaque. It is much less opaque now, not that it is entirely clear. A ratcheting up of tariff rates for most countries starting August 1 has been advertised, although the market has not been buying what the president has been selling, thinking for the most part that it is just negotiating leverage to extract better terms for the U.S.

This stock market, which sits near record highs, is priced for positive outcomes when it comes to tariffs, interest rates, the economy, and inflation, all of which feed into earnings.

Although earnings estimates for the second quarter have been lowered, expectations with respect to the earnings outlook are high. The calendar year 2026 EPS estimate of $298.97 translates to 13.8% year-over-year growth versus the calendar year 2025 estimate. We think the market has turned its eyes to the 2026 outlook to deflect some of the concern about trading at 22.3x forward twelve-month earnings, which encapsulates the remainder of 2025.

If the market cap-weighted S&P 500 is going to retain its premium multiple, the guidance coming out of the second-quarter reporting period needs to be optimal, particularly from the market's premium companies.

Let the reporting begin.

--Patrick J. O'Hare, Briefing.com