Bullish confidence on Wall Street soars: S&P 500 earnings growth hits a 30-year high.

During this earnings season, U.S. companies have significantly exceeded profit expectations. The S&P 500 Index reported a year-on-year profit growth of 31% in the second quarter, markedly surpassing Wall Street's previous forecast of 23%, and representing the strongest growth rate since 1992 for recovery periods post major recessions, as tracked by Bloomberg Intelligence. With over 90% of the components having disclosed their results, the index's profit performance in the first half of the year is on track to achieve the best results since the same period in 2021. The drive comes from both ends: artificial intelligence (AI) is rapidly penetrating markets, compressing costs and elevating profit margins; at the same time, the U.S. economy is exhibiting unexpected resilience despite multiple headwinds such as soaring energy prices triggered by the Iran conflict. Marta Norton, Chief Investment Strategist at Empower, stated: "Given the current macro backdrop, this outcome is particularly remarkable." AI is transforming from a "cost center" to a "profit center." The net profit margin for S&P 500 members that previously struggled to breach 14% is now approaching 16%. Mark Hackett, Chief Market Strategist at Nationwide Funds Group, directly pointed to the turning point: "For the past five years, AI has been a cost center for most companies, with only the hyper-scale cloud providers benefiting from a stock price perspective. This year marks a turning pointAI is truly beginning to serve as a profit center." Research from 22V suggests that AI has boosted profit margins by approximately 150 basis points. The technology sector retains the highest profit margins within the S&P 500, but an increasing number of companies in other industries are clearly quantifying the benefits attributed to AI during earnings calls. This trend is not unique to the U.S. According to Deutsche Bank data, European companies saw their net profit margin soar to a record 12% in the second quarter. BI data reveals that European executives mentioned AI in earnings calls an average of more than four times, a historical peak far exceeding the average of 0.5 since 2016. Barclays strategists such as Emmanuel Cau noted: "Quantifiable cost and efficiency benefits have become core themes, and an increasing number of management teams are discussing realized gains." Internal differentiation within technology: Who is realizing AI returns? This earnings season has also drawn a clear line within the technology sector: companies that can demonstrate cash returns from AI investments have been rewarded by the market; conversely, those unable to do so have faced penalties. Marta Norton pointed out: "The cloud business may be the clearest signal." She specifically highlighted the strong performances of Amazon and Microsoft, both of which exceeded expectations in their cloud businesses. In contrast, Facebook's parent company Meta faced a significant stock price drop due to revenue guidance that was perceived as disappointing by the market, although it has gradually recovered losses recently. The financial results of chip giant NVIDIA are yet to be released, making it a focal point for the market this month. Valuation compression, with earnings doing heavy lifting. The growth rate of earnings has outpaced the index's own rise, bringing about a crucial change: valuation compression. The price-to-earnings ratio of the S&P 500 has fallen from around 26 times at the beginning of the year to below 22 times. One of the biggest concerns at the start of the year was excessively high valuations, a risk that is now being mitigated by the growth in earnings. Keith Lerner, Chief Investment Officer and Chief Market Strategist at Truist Advisory Services, stated: "We have experienced a solid reset, and valuations have become attractive." Even within the technology sector, which has seen profit growth exceeding 20% for the seventh consecutive quarter, valuation multiples have retraced. Lerner believes that given the uncertain outlook on Federal Reserve policy and energy prices, tech stock valuations are unlikely to return to previous highs. Scott Rubner, Head of Equity and Derivatives Strategy at Citadel Securities, wrote in a report: "Currently, earnings are doing the heavy lifting, not valuation expansion." Grace Peters, Co-Head of Global Investment Strategy at JPMorgan Private Bank, stated on Bloomberg Television: "The magnitude of earnings upgrades is almost unprecedentedduring non-recovery periods, you don't see double-digit upgrades." Earnings diffusion: Not just a large-cap story. Wall Street strategists remain optimistic about the sustainability of earnings prospects, citing growth that spans nearly all sectorshealthcare is the only sector within the S&P 500 experiencing profit contraction. Data from Bespoke Investment Group shows that, as of August 12, among approximately 1,500 publicly listed U.S. companies that have disclosed their earnings, around three-quarters achieved both earnings per share and revenue that exceeded expectations. Ed Clissold, Chief U.S. Strategist at Ned Davis Research, stated: "This story has transcended the mega-cap stocks." He noted that the beat rate for small and mid-cap companies is nearing post-pandemic historical highs. Rob Haworth, Senior Director of Investment Strategy at U.S. Bank Wealth Management, commented: "This earnings season has shown positive breadth, which typically indicates that the same momentum will continue." Global resonance: Europe and Asia-Pacific strengthening in sync. The improvement in earnings is not solely an American phenomenon. BI data indicates that the MSCI Europe Index constituents reported a year-on-year profit growth of 18% in the second quarter, marking the best performance since 2022. Cyclical sectors such as energy, materials, and industrials have made significant contributions, pushing the Stoxx Europe 600 Index, the German DAX, and the French CAC 40 to consecutive record highs. Benedicte Lowe, equity derivatives strategist at BNP Paribas, stated on Bloomberg Television: "The macro story in Europe is undeniably improving. Moreover, this is happening while market positioning remains low to neutral, painting a positive picture for the stock market." Barclays analysts have also found that the proportion of European companies raising earnings guidance has reached a four-year high, with management confident in maintaining high profit margins. The Asia-Pacific region is also keeping pace. Since June, the earnings expectations for the MSCI Asia-Pacific Index have been revised up by nearly 10%, marking the largest increase for the same period since 2009. ASIA FINANCIAL recently recorded relative outperformance against the MSCI Asia-Pacific Index, the strongest single-month performance since 1998. Rajeev De Mello, Global Macro Portfolio Manager at Gama Asset Management, stated: "The AI theme remains dominant, particularly in the semiconductor sector. However, investors are increasingly broadening their focus beyond obvious chip stockslooking towards non-chip AI beneficiaries, financial stocks, and other stagnating sectors with lower valuation pressures." Outlook: Strategists raising target prices. The robust earnings performance is driving Wall Street strategists to raise their end-of-year target price for the S&P 500. The current average forecast has risen to 7,894 points, indicating about a 1% upside potential from this week's historical market levels. Analysts have also increased their full-year earnings growth expectation for the S&P 500 from 15% at the start of the year to 27%. The upcoming earnings report from NVIDIA will be the last key piece of the puzzle for this month, with its results likely to further test the validity of this earnings bull market. This article is reproduced from Wall Street Journal, edited by GMTEight: Chen Yufeng.