Earnings Are Crushing it. Stocks are Getting Crushed. Why Next Week is Crucial. -- Barrons.com

By Martin Baccardax

Investors aren't buying the earnings story this summer, in contrast to the spring rally that powered stocks to a record high in early June, suggesting a tough climb for markets over the back half of the year.

Early second-quarter earnings data suggests companies are beating Wall Street forecasts by nearly 9%, well ahead of the four-quarter average of around 7.5% and the 4.4% tallied since 1994, according to LSEG.

Nearly 85% of companies are beating estimates, compared with the recent average of around 80% and the historic reading of around 68%, and LSEG figures suggest overall second-quarter profit growth of 27%. That would take the total profits well past $700 billion, and mark the strongest first half performance in more than five years.

Earnings growth forecasts for the year remain robust, with analysts penciling in a 29.6% advance from 2025 levels, next year's pace tailing off to around 17%.

Stock aren't feeling it.

The S&P 500 is down nearly 2.7% from its early June peak, while the tech-focused Nasdaq Composite has tumbled more than 7.2% and edged closer to correction territory early in the Friday session.

Leading markets like South Korea's Kospi are down more than 26% from the highs reached in late June, while an index of U.S. semiconductor stocks has fallen more than 15%.

"The key question is whether the gap between prices and earnings expectations is a mispricing set to correct higher, or an early red flag for the profits outlook," JPMorgan strategists asked in a note published Thursday.

Bet on the red flag.

"High risk stocks appear to have already peaked, which is signaling that even with positive revisions, a price rally may not deserve to follow, and the edge is shifting decisively to high quality over high risk," the team added.

That rotation is playing out through the rise in defensive sectors such as healthcare, which has paced all market gainers since the S&P 500 reached its peak on June 2 with a 10.3% advance.

Real economy sectors such as financials, utilities, and industrials are leading the advance, while the information technology, consumer discretionary and consumer services sectors have all fallen between 7% and 10% since the market's early June peak.

The Big Tech trade is looking a bit sickly heading into next week's crucial stretch of earnings, which includes updates from Apple, Microsoft, Amazon, and Meta Platforms.

An index of the Magnificent Seven stocks fell the most since April of last year on Thursday, shedding nearly $800 billion in value on the way, after Google parent Alphabet boosted its full-year AI spending forecasts and Tesla posted its first cash burn in more than two years. That stoked Tesla's biggest post-earnings decline on record.

Investors also have to worry about the odds of Federal Reserve interest-rate hike now that benchmark 10-year Treasury notes yields are trading at the highest levels of the year and crude oil prices tracked back over $100 a barrel this week.

The introduction of new tariffs on the majority of U.S. trading partners will create a "toxic trio of geopolitical risk" for tech and broader markets. says David Russell, global head of markets at TradeStation.

"Investors were fine with high multiples and weak cash flows, but it's more of a challenge when rates are rising and new tariffs are hitting," he said. "Companies may face pressure to slow capex over time, which could punish chips and hardware."

John Belton, portfolio manager at Gabelli Funds, sees it differently, and says markets were "caught off guard" by the resumption of hostilities between the U.S. and Iran, making it more difficult for tech stocks to "find a footing" in the crude and bond yield surge that followed.

There's merit to that view, given that earnings from chip equipment maker ASML and contract semiconductor giant TSMC topped Wall Street forecasts last week, but failed to stem the broader market decline.

The same was true for Google, which posted impressive sales and earnings, including a massive revenue gain for its flagship cloud business, but saw its shares drop sharply.

Belton thinks that might have been a mistake.

"While the market is showing fatigue and continues to express doubts that these companies can continue to generate attractive returns on AI capex," he said. "But with valuations at historic lows, and fundamentals potentially getting even stronger, it wouldn't be surprising to see a bit of a shift in sentiment around this group." Next week's earnings slate, and the Fed's inflation commentary, will be the best chance this summer for that shift to take place. If not, it's likely to be a pretty rough autumn ride.

Write to Martin Baccardax at martin.baccardax@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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July 24, 2026 13:43 ET (17:43 GMT)