Earnings galore: accelerating at greatest pace since post-COVID

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Last week’s title was very clear: “The market is telling us something. Don’t ignore it.”

I talked about oil being close to $100 and markets flying off to new all time highs amid great earnings reports and lower than expected inflation numbers. This week oil closed over $100, and yet, markets are at new all time highs.

Last time oil was over $100 (end of March, early April), SPX was at 6,400 (11-12% lower then now), and the VIX was close to 30.

Now VIX is at 17. SPX at 7,250.

News from Iran is no longer what concerns markets at all. We seem to have fully priced in that this will be over and that oil will stabilize. The panic element has been removed almost entirely and focus has shifted to earnings. This is what I mentioned last time:

…markets do not trade headlines. They trade underlying conditions. And the conditions are still pointing in one direction: earnings are accelerating, AI capex is not slowing, semis are leading, positioning is still not euphoric, and the market is beginning to look through the oil shock as long as the economy does not crack (we still have bonds warning us over that).

When did it start? If you recall the April 4th newsletter I noticed the first major decoupling between the VIX and Oil prices. Granted, I was still very careful back then, but it was the sign of things to come. And the decoupling is still in play. Notice that the entire rise of oil from mid April until the end of April (over 20% increase) had almost no impact on the VIX. In fact, VIX went down. To 17. As far as the market is concerned, the Iran war story is done. It would take a big unexpected shock for the panic to resurface over the whole war issue.

Next stop, Cuba!

Which brings us back to inflation expectations and the Fed.

On Wednesday, Powell ran his final meeting as Fed Chairman and, as expected, delivered no change to interest rates. I pointed out on Tuesday that this meeting was not going to leave any impact on markets, and that earnings were the thing to watch this week. More on that below.

We did get elevated inflation, however. The latest PCE report (PCE inflation is the Fed’s preferred inflation gauge) came in at 3.5% headline and 3.2% core, highest since November 2023, when the Fed was still in hiking mode.

That is concerning as it impacts Fed expectations. Notice how the 2027 probabilities are slowly shifting back to hikes. Yikes!

But don’t sweat, predictions this far out usually don’t mean much. Just pay attention to what the bond market is saying, as it anticipates the impact of the new Fed Chairman, Kevin Warsh. The 10Y yield was back up over 4.4% this week, and the MOVE index (the VIX for bonds) was jumpy this week, but equities didn’t react much at all. Why? Earnings, obviously.

HEADS UP: I will do a separate piece on bonds and macro regimes next week. We’re cooking something fun at ORCA. Here’s a sneak preview:

Earnings are not just “fine.” They are accelerating.

The biggest story of this week and of this entire rebound are obviously earnings. Everyone came into this earnings season looking for the crack. Oil shock. War risk. Inflation reaccelerating. Private credit collapsing. AI capex issues. Pick your favorite bear case - the market gave you plenty to choose from.

But then the earnings came in.

And the answer, so far, is: earnings growth is accelerating at a pace we have not seen since the post-Covid rebound.

According to 3Fourteen Research, earnings estimates are growing faster than they did in the mid-90s or the late internet bubble. But the most impressive thing is that this growth is not a consequence of some major recovery following a large EPS drawdown. That is rare and suggests and the AI capex play is very much still being priced in.

According to FactSet, with 63% of S&P 500 companies having reported, 84% have beaten EPS estimates and 81% have beaten revenue estimates. That alone is strong. But the more important number is the magnitude: companies are reporting earnings 20.7% above estimates, the highest surprise percentage since Q1 2021 if it holds. The blended S&P 500 earnings growth rate is now 27.1%, up from 15.0% last week and 13.1% at the end of March. If this is where the quarter finishes, it will be the strongest earnings growth rate since Q4 2021.

This is why the market refuses to die despite all the bad oil-related news, despite the bond market, and despite inflation becoming a problem again.

The bear case keeps pointing to the macro. The market keeps pointing to earnings.

And right now, earnings are winning.

The obvious driver are Mag7. GOOGL, AMZN, and META alone accounted for 71% of the net dollar increase in S&P 500 earnings over the past week. Mag7 earnings growth has been revised up from 22.4% expected at the end of March to 61.0% today. Four of the top five contributors to year-over-year S&P 500 earnings growth are now Mag7 names: GOOGL, NVDA, AMZN, META.

But the clean headline comes with an asterisk.

Some of this earnings strength is real operating leverage. Some of it is AI. Some of it is margins. And some of it is one-time accounting. Google’s EPS included a $37.7 billion net gain from non-marketable equity securities. Amazon’s EPS included $16.8 billion of pre-tax gains from its Anthropic investment. Meta’s EPS included an $8.03 billion tax benefit. That does not make the earnings season fake. It means you cannot look at the 27% headline number and pretend every dollar came from recurring core operations.

This is the nuance. The earnings boom is real, but it is not evenly distributed and it is not entirely clean.