Learnings from Earnings

Broad earnings growth and company-specific execution, rather than valuation expansion or sector exposure, are becoming the main drivers of equity returns.

• Adjusted S&P 500 earnings grew 32% year over year in the second quarter of 2026, while more than 85% of companies beat earnings expectations and roughly 70% exceeded revenue forecasts.
• Valuations contracted across many major markets, so returns were primarily driven by delivered earnings; Japan, Asia Pacific, and emerging markets were the strongest performers over the past year on this basis.
• Earnings outcomes diverged sharply within the same industries: healthcare reported negative sector earnings growth, yet many companies beat expectations through commercial execution, stronger demand, and product adoption.
• The three largest cloud providers generated nearly $400 billion in annualized revenue, up 43% year over year, while cloud margins remained stable to higher despite increased capital spending.
• Strength extended beyond AI infrastructure into consumer, industrial, infrastructure, healthcare, and technology-related end markets, with management teams citing resilient consumption, margin improvement, and investment in cloud, power, and industrial modernization.

Takeaway: The authors see a favorable environment for fundamental research and active stock selection because execution, competitive positioning, and innovation are creating greater dispersion, although evidence that AI spending is generating returns remains early.