In the presence of artificial intelligence More than a year after AI dominated the headlines, Wall Street’s bullish rationale is shifting toward something more fundamental to the stock market: earnings growth is beginning to extend beyond large tech companies.
Morgan Stanley Morgan Stanley, UBS, and other Wall Street giants have pointed to clear trends this earnings season: strong earnings, stabilizing profit margins, and growth that, while still concentrated in the field of artificial intelligence, has begun to "spread."
"There are clear signs that corporate earnings are recovering and pricing power is increasing," Morgan Stanley equity strategist Mike Wilson wrote in a recent report.
Wilson's team's data shows that the so-called "Big Seven" tech companies are expected to see a 23% increase in net profit in the third quarter, while the net profit growth rate for other companies in the index is 12%. However, he said, "We are seeing that as expected revisions continue to be made upward, revenue remains well above historical averages, and the overall growth momentum will gradually improve."
The latest data from FactSet also supports this: as of now, over 90% of S&P 500... Companies in the S&P 500 index reported earnings, with 82% of them exceeding expectations and overall profits increasing by 13.1% year-over-year. This marks the fourth consecutive quarter of double-digit growth.
In addition, six of the index’s 11 sectors saw earnings growth compared to the same period last year, with the technology, financial, and consumer discretionary sectors leading the way. This is a modest but noteworthy sign that strong growth momentum is beginning to spread.
However, some strategists warn that this trend needs to continue from now on. "Earnings expectations have partially rebounded," wrote Lori Calvasina, a strategist at RBC Capital Markets, in a note to clients, adding that while revisions have improved for two consecutive weeks, they remain "well below" summer highs.
She also pointed out that earnings continue to provide a solid foundation for the U.S. stock market, but the latest recovery is "not enough to challenge the view that earnings sentiment peaked in the summer."
She wrote that last week's stock market pullback was "the sound of thunder gathering in the distance"—a sign that investors remain uneasy even as profits remain stable.
"K-shaped stock market"
This unbalanced backdrop illustrates what Evercore ISI strategist Julian Emanuel calls a “K-shaped stock market,” reflecting the outperformance of high-quality growth stocks related to artificial intelligence relative to the S&P 500.
However, he pointed out, "Participation in the bull market has always been high. This is a key difference between today's market and the dot-com bubble period, and it is also crucial for further gains in the future."
Emanuel believes this dynamic will support his S&P 500 target price of 7,750 by the end of 2026. He argues that although the top 10 stocks account for about 40% of the index, "they are not overvalued," providing "support and a pathway for further gains."
In addition, UBS has just raised its target for the S&P 500 to 7,500 by the end of 2026 and expects earnings growth of 14.4%, believing that earnings growth will no longer be limited to the technology sector as capital investment "expands outward from the narrow technology sector".
(Article source: CLS)
