What happened
US corporate earnings are coming in far stronger than expected this quarter. With 27 percent of the S&P 500 having reported second quarter results by 24 July, the index is on track for its highest year on year profit growth since the third quarter of 2021, according to data from FactSet.
Both the share of companies beating profit forecasts and the size of those beats are running above recent averages. A standout was Alphabet, which reported earnings per share of 9.11 dollars against the 2.88 dollars analysts expected, flattered by a 98 billion dollar investment gain but underpinned by an 82 percent surge in cloud revenue.
Financial giant BlackRock also beat, posting 13.91 dollars per share against a 12.69 dollar forecast, with revenue of 7.08 billion dollars. Analysts now expect profit growth to continue, pencilling in rates above 24 percent for the final two quarters of the year.
The strong season has helped US indices hover near record highs, even as volatility crept in around technology spending and the oil price.
Why it matters
Company profits are the ultimate engine of share prices. Over the long run, shares rise because the businesses behind them earn more money. A strong earnings season is therefore reassuring evidence that the recent rally rests on real results, not just optimism.
It matters especially now because markets have been jittery about whether huge spending on artificial intelligence will pay off. Robust profits, particularly from technology firms, help answer that question and can steady nerves after a volatile stretch.
Strong earnings also give companies room to invest, hire and reward shareholders through dividends and buybacks. That feeds through to the wider economy and to the funds that hold these shares on behalf of ordinary savers.
The concern is breadth. If the gains are concentrated in a few technology giants, the health of the market may be narrower than the headline numbers suggest.
Explained simply
Think of earnings season as a national school report for big business. Every quarter the companies bring home their grades, and this term most are beating the teachers predictions.
Four times a year, listed companies must report how much they earned. Before they do, analysts publish forecasts. When the actual figures beat those forecasts, as most are this quarter, share prices often rise because the business did better than the market had priced in.
The phrase profit growth since 2021 simply means companies are earning more, compared with a year earlier, than at any point in roughly four years. That is a sign the corporate world is in good health despite higher interest rates and global tensions.
One wrinkle is one off gains. The Alphabet result was boosted by a paper gain on an investment, not just its day to day business. Analysts strip these out to judge the underlying trend, which for now looks genuinely strong.
What it means for you
If you save into a pension or a Stocks and Shares ISA, strong corporate profits are quietly good news for you. Most such savings are invested in funds that track indices like the S&P 500, and when the companies inside earn more, the value of those funds tends to rise over time.
A typical S&P 500 tracker held within a UK pension has delivered solid long term returns precisely because of periods like this, when profits grow faster than expected. You do not need to do anything to benefit; the growth is reflected in your fund value.
That said, past performance is no guarantee, and much of this quarter strength is concentrated in a few technology names. If you want to reduce reliance on them, funds that spread across regions and sectors can help. It is worth checking, perhaps once a year, how balanced your holdings are.
The takeaway: this earnings season supports the value of the mainstream funds most savers already own.
The bigger picture
A strong earnings season is a reassuring counterweight to the anxieties over AI spending and geopolitics that rattled markets this month. It suggests the underlying corporate economy remains healthy even as headlines turn stormy.
The question for the months ahead is whether growth stays broad or narrows to a handful of giants. Watch how the remaining three quarters of the S&P 500 report, and whether profit growth holds up into the year end as analysts expect.
