Reviewing Q1 Earnings and What Q2 Expectations Say

With the school year wrapping up, report cards are trickling out. Corporate America also nearly has its full Q1 grades, as all but one S&P 500 company have now reported earnings. It was a solid showing overall, as US businesses largely walloped Wall Street’s expectations entering 2026. This is all backward-looking, of course. But it shows what markets have been pre-pricing lately—and it speaks to elevated expectations in several categories, a sign this bull market 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.^[i] 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. Exhibit 1 shows how each sector fared versus expectations.

Exhibit 1: Q1 Earnings Largely Impressed…

Source: FactSet Earnings Insight, as of 6/10/2026.

As you can see, Tech contributed most to Q1 growth, with booming 54.8% y/y earnings growth in the quarter, while Communication Services and Consumer Discretionary provided the biggest upside surprises. As in much of 2025, AI-related products and services—ranging from memory chips and data center infrastructure to advertising software—drove the lion’s share of strength in Tech and Tech-adjacent Communication Services industries. While some questioned whether AI demand was over its skis entering 2026, Q1 showed earlier estimates were still too timid. “Tapped out consumer” fears also carried into this year, but with over 55% of Consumer Discretionary firms and 7 of 9 subindustries beating Q1 earnings expectations, those worries still seem false.

On the other end, Health Care was the only sector to contract and negatively surprise—though there is a bit of an asterisk. 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 suggest fundamental weakness or cause for alarm. Outside of this, Health Care earnings were largely positive in Q1.

Stocks move most on the gap between reality and expectations, so it stands to reason markets have been pricing in Q1’s broad positive surprise for months now. The question from here is how long that gap can last as expectations upshift, which they did for Q2. According to FactSet’s Earnings Scorecard, the S&P 500’s expected aggregate earnings growth rose from 13.9% y/y at 2026’s start to 21.4% today.^[ii] 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 6/10/2026.

As expected, Energy’s earnings expectations took the largest leap tied to the war in Iran. Oil and gas firms’ profits tend to track global oil prices, which were elevated for much of Q2 thus far. That suggests another quarter of big profit growth, but a very well-expected and pre-priced one, in all likelihood, given how widely watched and telegraphed all things Hormuz are. We mean, Saturday Night Live had a “Hormuz Jeff” sketch recently, which was funny-ish. But humor value aside, it shows the chokepoint is well understood.

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 center buildouts, analysts and investors are increasingly warming toward America’s largest sector. They now project 57.7% y/y earnings growth in Q2, which is quite a humdinger.

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 federal government’s proposed near-flat Medicare Advantage rate increase could factor in, too. Industrials’ expectations also fell, which seems tied to widespread fears of elevated oil prices and borrowing costs raising input costs and sapping margins. And despite Q1’s strength, analysts still see weaker Consumer Discretionary earnings in Q2—highlighting continued consumer spending worries, likely compounded by presumptions people will buy fewer nice-to-haves while gas prices are high.

Diverging sector expectations help illustrate sentiment’s warming. Consider where Wall Street analysts’ favor focuses—and common characteristics within these categories. 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, favor seems to be shifting from defensive (e.g., Consumer Staples, Health Care) and cyclical (e.g., Financials, Consumer Discretionary) sectors to growthier, more offensive ones (e.g., Tech and Communication Services).

This is revealing for markets, showing sentiment toward Tech, Communication Services and Energy is likely pretty lofty. It takes much more growth to deliver positive surprise as a result—and raises the risk of disappointment. Yet that enthusiasm hasn’t spread market-wide, as downbeat expectations for defensive and cyclical categories like Financials, Consumer stocks and Health Care illustrate. We think this favors their leading in the not-so-distant future.

While aspects of this warmer sentiment look like a later stage bull market to us, that doesn’t necessarily signal an imminent bear market. Sentiment’s warming can take a loooong time and stocks can rise even amid emerging euphoria, which we don’t think is prevalent now. But the elevated sentiment towards Tech and AI could spread, perhaps driven by IPO excitement. We will continue monitoring this. So while we think this bull market still has plenty of fuel, sentiment’s warming is worth noting.