Sep 1, 2026 · 32 min · 9 segments
Over the last year, the Eye on the Market included views on sectors, rates and currencies. For this back-to-school piece, I prepared a rear window post-mortem on each…
Michael CembalestHostThe good news is this has been, in terms of a market update, this has been a very strong year for earnings revisions.
If you take a look at the evolution of what earnings do over the year in terms of their projections for the year end, other than 2021, which was a weird post-COVID year, this is the strongest earnings revisions year since 1996 in that earnings projections are rising around 10% compared to where they started the year.
The other thing that was good about the Q2 earnings season was positive news for the hyperscalers.
There were rising revenue backlogs, which is reinforcing evidence that companies are starting to be able to monetize AI.
And earnings strength is also more broad-based now than it was in 2024, 2025, when 40 or so AI-related stocks were the primary drivers.
Now, the question is, is it sustainable? Because the earnings growth appears to be very contingent on continued AI capital spending, which has risen from about $200 billion a year in 2024 to $750 billion over the last 12 months.
There's a chart we have in here that explains why I think earnings strength is so contingent on this.
The share of companies with rising earnings is very closely linked to this ISM manufacturing survey.
But over the last two, three years, there's a huge increase in the share of companies with positive forward EPS guidance, but not such a big increase in the manufacturing PMI.
So to me, that's a clue that we're having outsized earnings growth here that's disconnected from the broad economy and very much being driven by the boom in capital spending.
Q2 had a ridiculous almost 50% earnings growth figure, which is only, let's say, 30% if you strip out some of these other income revaluation gains.
The good news is this has been, in terms of a market update, this has been a very strong year for earnings revisions.
If you take a look at the evolution of what earnings do over the year in terms of their projections for the year end, other than 2021, which was a weird post-COVID year, this is the strongest earnings revisions year since 1996 in that earnings projections are rising around 10% compared to where they started the year.
The other thing that was good about the Q2 earnings season was positive news for the hyperscalers.
There were rising revenue backlogs, which is reinforcing evidence that companies are starting to be able to monetize AI.
And earnings strength is also more broad-based now than it was in 2024, 2025, when 40 or so AI-related stocks were the primary drivers.
Now, the question is, is it sustainable? Because the earnings growth appears to be very contingent on continued AI capital spending, which has risen from about $200 billion a year in 2024 to $750 billion over the last 12 months.
There's a chart we have in here that explains why I think earnings strength is so contingent on this.
The share of companies with rising earnings is very closely linked to this ISM manufacturing survey.
But over the last two, three years, there's a huge increase in the share of companies with positive forward EPS guidance, but not such a big increase in the manufacturing PMI.
So to me, that's a clue that we're having outsized earnings growth here that's disconnected from the broad economy and very much being driven by the boom in capital spending.
Q2 had a ridiculous almost 50% earnings growth figure, which is only, let's say, 30% if you strip out some of these other income revaluation gains.
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