Why are investors afraid of such amazing results?

There are always things investors should be worried about.

After all, the world is far from perfect. And there are threats to economic prosperity around every corner.

But do you know one thing we can almost certainly rest assured of?

The fact that this year’s second quarter is shaping up to be one of the best showings the S&P 500 has ever seen. That’s in terms of both top- and bottom-line growth, for the record.

We’re talking about fundamental levels that have only happened a few times in human history. No exaggeration.

Looking at the most recent second-quarter market data, we see that 88% of S&P 500 companies have reported earnings so far. And in aggregate, their results are blowing prior estimates out of the water.

Back on June 30, at the beginning of earnings season, Wall Street’s consensus estimate for Q2 growth was 23.1%. That would have represented a great quarter in and of itself.

But now that the vast majority of S&P 500 stocks have posted, it’s become clear that analysts were wrong about that estimation. Very, very wrong since, through August 7, these companies’ blended year-over-year earnings growth was 50.4%.

In other words, they’ve more than doubled Wall Street’s prior estimates!

Investors should be celebrating the success that U.S. companies are displaying right now. But for some reason, I seem to be seeing the exact opposite these days.

We’re staring down record results practically every day. Yet practically every day, it seems like more investors, analysts, and market commentators are questioning whether this is too good to be true.

It’s like they’re deliberately trying to turn this glorious news into a net negative. Can’t we just be happy – or even simply grateful –about the excellence on display?

Considering the details behind the data, I think we’re more than justified.

Don’t get me wrong. There is a time to worry about the S&P 500’s fundamentals.

But it’s not when companies are posting 50%+ earnings per share (EPS) growth.

Now, it is worth noting that two companies have accounted for a significant portion of the upside surprise. And, yes, they’re both Big Tech players.

Also worth noting, most of these gains were related to net unrealized gains associated with their large positions in Anthropic. (Whose valuation in private markets, incidentally, is soaring due to historical revenue growth.)

Even so, it’s not as if these two companies and their well-timed investments are the only reason for the larger S&P 500’s 50.4% EPS growth rate. FactSet reports that excluding Alphabet and Amazon, the S&P 500’s Q2 blended growth rate would still have been a fairly fantastic 32%.

Moreover, as you can see below, 10 out of the 11 S&P 500 sectors have posted positive year-over-year quarterly EPS results so far. And eight have posted at least double-digit growth.

That broad range of success stories is what makes me so confident about the strength of the larger market.

This isn’t a one- or two-stock story. Big Tech isn’t the only force driving markets higher anymore.

Instead, the vast majority of S&P 500 names are firing on all cylinders right now. And that more than justifies the market rally we’ve seen.

Frankly, I wouldn’t be surprised to see the second-quarter growth rate tick higher still. After all, as I write this, mega caps like Nvidia (NVDA) and Broadcom (AVGO) still haven’t reported yet.

But assuming it only holds steady, this will be the best quarter year over year in terms of earnings growth since Q2-21 – a comparison that becomes much more impressive when you realize where companies were back then.

Remember that earnings had fallen off a cliff during Q2-20 because of the global lockdowns, with the S&P 500’s EPS falling by 31.6%. So it only makes sense we saw massive growth during the next calendar year.

That’s not the case today, however.

Today, stocks are facing double-digit comparisons. EPS grew 11.7% during Q2-25. And still they’re seeing their bottom-line results accelerate higher.

That’s great news. Full stop.

This isn’t something that should cause stress or anxiety – especially in today’s market, where the price action of the major averages has significantly lagged underlying fundamental performance.

On June 30, the S&P 500 was trading at approximately 7,500. Today, it sits at 7,792. That means it’s climbed by about 3.9% since companies began reporting their astounding Q2 growth figures.

Once again, that’s great. Others can wring their hands over it, but I’m not objecting to markets hitting all-new levels.

Besides, they don’t seem to realize that the current reality means earnings are growing at a much faster rate than share prices. In which case, the market is getting cheaper despite climbing to record highs.

Its price-to-earnings (P/E) multiple is actually falling thanks to that mismatch between fundamental growth and price appreciation.

Coming into the year, the consensus forecast for the S&P 500’s EPS was about $310. Today, it’s risen to the $360 area, an increase of 15.5% or so.

Yet on a year-to-date basis, the S&P 500 is up just 13.7% – meaning that share prices are lagging fundamentals.

As you can see on the chart above, the market's forward P/E ratio has actually fallen throughout Q2. That means investors are far from enthusiastic about recent earnings results.

There’s fear in the markets, pure and simple. But, truth be told, that’s perfectly fine by me.

As a long-term investor, I understand that secular bull markets always climb a wall of worry.

Looking at all this data, two things are clear to me:

Today, the market is trading with a forward P/E ratio of approximately 20x. Its five- and 10-year averages are 19.9x and 19x, respectively.

As such, we’re looking at valuations that are in line with recent averages… while experiencing bottom-line growth that’s well above the historical mean.

This makes me especially bullish on the markets in the short-term. So much so that I’ll come right out and say it: I believe the S&P 500 will cross the 8,000 threshold by year’s end.

Which will be just one more market detail to celebrate.

Kind regards,

Nick Ward
Analyst, Wide Moat Research

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