Reviewing America’s Q1 Earnings and What Q2 Expectations Say

As June winds down and students wrap their A-Levels and GCSEs, Corporate America already has its grades. Not for Maths and Chemistry (we think), but for Q1 corporate earnings. All S&P 500 companies have now reported their results, and we think it was a solid showing overall as US businesses largely beat Wall Street’s expectations entering 2026.^[i] Whilst this is all backward-looking for stock markets, we think it shows what markets have been pre-pricing lately—and we find it speaks to elevated expectations in several categories, a sign this bull market (long period of generally rising equity prices) is likely entering its later stages.

S&P 500 firms’ earnings grew 28.8% y/y in aggregate in Q1, accelerating from Q4 2025’s 13.9% and smashing analysts’ estimates for 12.9% growth.^[ii] All but one sector’s earnings grew and about 84% of reporting companies beat estimates, above the roughly 78% average over the past 5 years.^[iii] Exhibit 1 shows how each sector fared versus analysts’ consensus expectations.

Exhibit 1: Q1 Earnings Largely Impressed…

Source: FactSet Earnings Insight, as of 23/6/2026.

As this shows, Tech contributed most to Q1 growth, with booming 54.8% y/y earnings growth in the quarter, whilst Communication Services and Consumer Discretionary provided the biggest upside surprises. As our research showed for much of 2025, AI-related products and services—ranging from memory chips and data centre infrastructure to advertising software—drove the majority of strength in Tech and Tech-adjacent Communication Services industries. Whilst some commentators we follow questioned whether AI demand was overwrought entering 2026, we think Q1’s results showed earlier estimates were still too timid. We have also observed speculation around supposedly tapped out American consumers slowing spending this year, but with over 55% of Consumer Discretionary firms and 7 of 9 subindustries beating Q1 earnings expectations, those warnings still seem off base to us.

On the other end, Health Care was the only sector to contract and negatively surprise—though we see a bit of a caveat. Q1’s fall was tied heavily to an unexpected, one-time accounting charge weighing on profitability at one major Pharmaceuticals company. For what it is worth, this firm’s Q1 revenues topped expectations, which doesn’t seem to us like fundamental weakness or cause for alarm.^[iv] Outside of this, Health Care earnings were largely positive in Q1.

Our research shows stocks move most on the gap between reality and expectations, so we think it stands to reason markets have been pricing in Q1’s broad positive surprise for months now.^[v] The question from here, in our view, is how long that gap can last as expectations upshift, which they did for Q2. According to FactSet’s Earnings Scorecard, analysts’ expected S&P 500 aggregate earnings growth rose from 13.9% y/y at 2026’s start to 22.1% today.^[vi] But this doesn’t mean enthusiasm is surging across the board, as Exhibit 2 shows.

Exhibit 2: …Pushing Up Expectations

Source: FactSet Earnings Insight, as of 23/6/2026.

As we expected, Energy’s earnings expectations took the largest leap tied to the war in Iran.^[vii] Oil and gas firms’ profits tend to track global oil prices, which were elevated for much of Q2 thus far.^[viii] That suggests another quarter of big profit growth, but likely a very well-expected and pre-priced one, given how publications and commentators we follow near constantly monitor all things happening in the Strait of Hormuz.

Expectations also jumped for Tech, which doesn’t surprise us, either. After several quarters of earnings beats and hefty guidance for AI chip demand and data centre buildouts, analysts and investors appear to be warming even more toward America’s largest sector. They now project 59.2% y/y earnings growth in Q2, which is quite lofty, in our view.

Conversely, expectations for Health Care companies declined most. We reckon some of this is simply Q1’s disappointment carrying over, but insurers’ potentially higher costs and the US government’s proposed near-flat Medicare Advantage rate increase could factor in, too. Industrials’ expectations also fell, which we think is tied to widespread warnings we have seen that elevated oil prices and borrowing costs will raise input costs and sap margins. And despite Q1’s strength, analysts still project weaker Consumer Discretionary earnings in Q2—highlighting continued negative sentiment toward consumer spending, likely compounded by presumptions people will buy fewer nice-to-haves whilst petrol prices are high.

In our view, these diverging sector expectations help illustrate sentiment’s warming. Consider where Wall Street analysts’ favour focuses—and common characteristics within these categories. According to our research, Energy’s massive swing rests solely on war-related economic factors. Given how oil price-dependent its earnings are, we would be shocked if expectations hadn’t spiked. Outside of this, favour seems to be shifting from traditionally defensive (e.g., Consumer Staples, Health Care) and cyclical (e.g., Financials, Consumer Discretionary) sectors to growthier, traditionally more offensive ones (e.g., Tech and Communication Services).

We think this reveals sentiment toward Tech, Communication Services and Energy is likely pretty warm right now. Thus, our research suggests it will probably take much more growth to deliver positive surprise as a result—which we think raises the risk of disappointment. Yet we don’t think that enthusiasm has spread market-wide, as downbeat expectations for defensive and cyclical categories like Financials, Consumer stocks and Health Care illustrate. We think this favours their leading in the not-so-distant future.

Whilst aspects of this warmer sentiment look like a later stage bull market to us, that doesn’t necessarily signal an imminent bear market (prolonged, fundamentally driven broad equity market decline of -20% or worse). Our research finds sentiment’s warming can take a long time and stocks can rise even amidst emerging euphoria, which we don’t think is prevalent now. But the elevated sentiment toward Tech and AI could spread, perhaps driven by initial public offering (IPO) excitement. We will continue monitoring this. So whilst we think this bull market still has plenty of fuel, sentiment’s warming is also worth noting, in our view.