US stock Q2 earnings season is approaching: Profit expectations are skyrocketing to the strongest since the post-pandemic era, and the market is poised to face the "toughest test in history."

With major Wall Street banks leading the way this week in releasing their report cards, the U.S. stock market is about to enter the second quarter earnings season. However, unlike in previous years, this earnings season is facing extremely high performance expectations - S&P 500 index component companies are expected to report profit growth of over 23%, reaching the strongest level since the post-pandemic recovery. With the stock index approaching historic highs, the unusually steep "passing line" for profits means that margin for error is rapidly shrinking, and any slight movement could trigger sharp volatility. Profit growth in full swing: Technology no longer dancing alone According to LSEG IBES data, analysts' forecasts show that overall earnings for the second quarter of the S&P 500 index are expected to increase by 23.4% year-on-year, a significant increase from the initial forecast of 15.2% at the beginning of the year. Following the unexpectedly high profit growth of 29.4% in the first quarter, analysts have been continuously revising their expectations throughout the year, with HSBC Global Investment Research describing this round of growth as "the strongest profit expansion in the post-pandemic era." At the same time, several top Wall Street institutions have sent out a common signal on the eve of the earnings season: the strong growth in corporate earnings is spreading beyond the tech giants, providing a healthier and more broad-based support for the stock market's rise. Morgan Stanley's Chief Strategist Michael Wilson's team pointed out that the median earnings per share growth of the S&P 1500 composite index component stocks has exceeded 10%, the best performance since the pandemic recovery. Wilson emphasized that industries highly correlated with economic prosperity, such as non-essential consumer goods and transportation, are continuing to receive upward revisions in earnings by analysts. "We expect that as the earnings resilience of the majority of component stocks continues to show, the diffusion effect of the uptrend is expected to continue." In fact, this judgment has been confirmed in terms of index performance, as the equal-weighted S&P 500 index has surpassed the market cap-weighted S&P 500 index since 2022 for the first time. The equal-weighted index weakened the influence of large technology stocks, and its relative strength means that more ordinary stocks are participating in the current uptrend. However, some institutions continue to be bullish on the earnings resilience of the technology sector. Lori Calvasina, Capital Markets Strategist at RBC Capital Markets, has upgraded the rating of the technology sector to "overweight" on the grounds that revenue and profit forecasts for the sector have both been significantly revised upwards, while trends of capital inflows have reappeared. "The valuations in the technology sector are indeed not cheap, but in our latest calculations, whether it is the median absolute price/earnings ratio or the relative price/earnings ratio, the sector is only slightly above the long-term average," said Calvasina. Nicole Inui, Director of Americas Equities Strategy at HSBC Global Research, predicts that the energy, information technology, and materials sectors will lead this earnings season, with the energy and technology sectors expected to achieve triple-digit and double-digit growth, respectively. According to LSEG IBES data, the energy sector is benefiting from soaring oil prices, with earnings expected to increase by approximately 115%; the technology sector, with its high weight, is expected to grow by 65.5% driven by investments in artificial intelligence (AI); and the materials sector is also expected to deliver growth of 32.5%. Subtle changes in valuation and "higher thresholds" From a positive perspective, one change brought about by the upward revision in earnings expectations is that strong growth is "passively" easing the pressure of high valuations. Due to the rare occurrence of earnings growth outpacing stock price gains, the forward price/earnings ratio of the S&P 500 index has fallen from 22.2 times at the end of 2025 to 20.1 times. According to LSEG Datastream data, since 2026, the S&P 500 index has risen by 9%, while the upward revision of earnings forecasts for the next 12 months has reached 21%. Mark Hackett, Chief Market Strategist at Nationwide, said, "The market's performance is so strong that it is rare, and the earnings growth is even stronger compared to the market." However, on the other side of the coin, the extremely optimistic sentiment has raised the profit threshold to dangerous heights. An anomaly confirms the market's harshness: usually, analysts would lower their expectations before the earnings season to make it easier for companies to exceed them. But this time, driven by strong macro fundamentals and AI frenzy demand, expectations have not shown seasonal declines. As Yardeni Research put it, the risk is that "the exceptionally strong first quarter has made analysts overly optimistic for the next three quarters." Chris Fasciano, Chief Market Strategist at Commonwealth Financial Network, said, "Earnings growth and upward revisions are undoubtedly a positive for investors, as this in itself is the driving force behind the market's upward trajectory. But it cannot be denied that it has indeed raised the bar for reaching expectations." This high expectation has begun to trigger selective punishment in the market. The recent performance of the semiconductor sector is a case in point: while some companies (such as Samsung Electronics) have delivered decent results, the failure to significantly exceed the already elevated consensus has triggered profit-taking. Furthermore, concerns about the sustainability of earnings-driven market have not diminished. Hackett of Nationwide pointed out that he is closely monitoring whether revenue from AI-related activities and fiscal stimulus, among other drivers, is sustainable. "Many of these events are themselves unsustainable, and that's what worries me the most." Especially for the "mega-scale" companies that have invested heavily in AI infrastructure this year, investors are eager to see tangible results in this earnings season, as even strong capital expenditure data may struggle to support their stock prices further. Jack Ablin, Chief Investment Officer at Cresset Capital, bluntly stated that the decline in the market's forward price/earnings ratio reflects investors' caution when faced with limited visibility on AI earnings. "It's precisely because the future is unclear that we need to rely on this earnings season to find direction - we'll know more clearly where the future is headed." Joe Mazzola, Director of Trading and Derivatives Strategies at Janus Henderson Investors, warned, "We are entering the second-quarter earnings season with higher expectations. As profit forecasts have been revised upwards all the way, volatility in this earnings season is likely to be more intense."