1q26 Earnings Season and AI Capex Cycle Updated

Investors, combining our last few Stock Talks into one episode, leaves us here, It’s an Agentic AI Capex Boom Acceleration. So far, oil is up 50-75% since the Iran war began, and the markets shook it off.  Interest rates are running higher on both higher inflation and higher growth with the 30-year treasury now over 5%.  And yes, the S&P500 has shook it off so far.  Both are headwinds not a roadblock. Why? Because S&P500 EPS are booming.  Much like a previous capex cycle over 25 years ago. Yes, even earnings growth rates look familiar. to the 1997-2000 Dotcom capex run. But investors, even if we are reliving the past, there would still be room to run, because earnings matter more right now than the headwinds of higher oil and interest rates at these levels.

With more companies reporting earnings, let’s update last week’s piece and go back to what really drives stock prices over time… EARNINGS and earnings growth rates.

Not headlines. Not geopolitics. Not even the Federal Reserve most of the time. Once again, the data we are using is from FactSet Earnings Insight. They’ve updated their data and here’s the first chart on 12-month forward S&P500 EPS vs. the SP500 price.

EARNINGS.Price follows earnings—and right now reported earnings are accelerating sharply.

We are now two-thirds of the way through earnings season—and the data just changed meaningfully, in a good way. It just step functioned up higher. Meaningfully.

1. 1^st quarter EARNINGS SCORECARD so far? – BLOWOUT QUARTER

As of this filming, about 63% of companies have reported, 84% beating earnings, 81% beating revenue. Earnings surprise +20.7% which is the highest level since 2021 when we were exiting Covid lockdowns and expanding on the massive fiscal and spending recovery. S&P 500 earnings growth now +27.1%. Here’s the historical YTY EPS growth rates for the last 3 years.

Bottom line: This is not slow steady growth—this is a breakout earnings quarter. Where did the growth come from exactly? At the company level, the surprises reported by Alphabet, Amazon.com, and Meta Platforms were the largest contributors to the increase in the earnings the S&P 500 for Q1 during the past week. Combined, these three companies accounted for a massive 71% of the net dollar-level increase in earnings for the S&P 500 over this period. These are the largest companies in the world smoking revenue, EPS estimates and growth rates.

Alphabet reported a positive EPS surprise above 90% for Q1 ($5.11 vs. $2.68), compared to the 5-year average of 12.4% for this company. Yes, some of that were one-time gains on their VC portfolio. Amazon.com reported a positive EPS surprise above 70% for Q1 ($2.78 vs. $1.63. Meta Platforms reported a positive EPS surprise of 56% for Q1 ($10.44 vs. $6.67).

 

2. PROFIT MARGINS – NEW RECORD HIGHS

Net margins 14.7% – highest ever recorded

Up sharply from 13.2% last quarter with Tech near 30%, and Communication Services like Google expanding fast

Probably have to thank the Big Beautiful Bill and its accelerated depreciation schedule for some of this expansion.

Bottom line: Earnings growth is being driven by BOTH revenue and margin expansion.

3. FORWARD OUTLOOK – is high and STILL ACCELERATING

For Q2 2026, analysts are projecting earnings growth of 21.3% and revenue growth of 11.0%.

For Q3 2026, analysts are projecting earnings growth of 23.0% and revenue growth of 9.7%.

For Q4 2026, analysts are projecting earnings growth of 20.6% and revenue growth of 9.3%.

For CY 2026, analysts are projecting earnings growth of 20.6% and revenue growth of 9.7%. Full-year growth now ~20%+

EPS estimates rising—not falling (+2.1% in April)

Bottom line: Analysts are RAISING estimates very quickly which is very unusual this early in the quarter.

Ok I’m going to curb your enthusiasm a bit now looking out at those numbers say way out in the 4^th quarter of the year after growth is supposed to peak in 3q.   Many strategists are now saying that the current EPS growth rates and revisions are “unpresented”. Unfortunately, they aren’t.  Yes they usually happen coming out of recession, however they have occurred during expansions as well.  Once again, I’m going to take you back in the way back machine to the Dot.com cycle in 1997-2000.  Here is a table of the YTY quarterly S&P500 growth rates for the latter part of Dot.com.

Look at the table for a second now and tell me when the S&P500 peaked during Dot.com?  If you looked at those 26% and 22% YTY eps growth rates in 2q and 3q2000 and said sometime then, you would be wrong, because the S&P 500 peaked during dot.com? The last week in March 2000 right before earnings growth peaked at 32.75%.  If you stuck around after that, you we not have been rewarded even though EPS grew at mid 20%’s, and that was against positive comps. The good news, while the NASDAQ peaked and broke hard and fast in 2000, the S&P500 meandered lower slowly for much of 2000 before succumbing.

Once again, I’m bringing back the overlay of one of the most cyclical growth areas of the stock market, semconductir equipment manufacturing.  These companies make the equipment that make the semi chips we all use in everyday life as well as the leading edge semis used for AI training and inference being used in newer datacenters.  Here’s the overlay once again, current AI cycle vs. Dotcom.

Having invested in technolgy for most of my career, including before, during and after, the DotCom run in 1997-2000, I have never seen a semiconductor cycle end before orders at the equipment companies acclerate for 3-5 quarters minimun. 1q26 was the first quarter we saw a pick up in orders, ex china, in the semi equipment supply chain. Tough to have a peak semi cycle before additional capacity ramps in my experience.

For now, investors stay focused on what matters. Earnings, orders, revenue growth, margins. Keep your eyes on the prize, In this market, while higher oil has been a headwind, and higher interest rates are also another headwind, earnings aren’t just important… they’re almost everything.

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