S&P 500 corporate earnings guidance hits a record high: Has the rally in US stocks entered an earnings-driven phase?

July 23, according to Bloomberg data, the S&P 500 component companies’ earnings guidance (EPS Guidance Momentum Score) has risen to an all-time high. The proportion of companies raising earnings expectations far exceeds those cutting or keeping their expectations unchanged, creating the largest positive deviation on record.

This data has unusually significant meaning in the context of earnings season. Earnings guidance—management’s forward-looking assessment of future earnings—has typically been regarded as a signal with more “insider information” content than analyst forecasts. When a large number of companies simultaneously choose to raise guidance rather than cut it, the message it conveys is far deeper than just the up-and-down moves of an index: companies’ own expectations for future profits are improving systematically.

For U.S. stock investors, the importance of this signal lies in the possibility that it marks a fundamental switch in the market’s upward driver—from an “AI narrative” rally driven by valuation expansion to a “fundamentals” rally driven by earnings growth. Starting from the EPS Guidance Momentum Score indicator, this article breaks down the true state of current U.S. earnings expectations and analyzes the structural implications of this change for the outlook ahead.

EPS Guidance Momentum Score Overview

EPS Guidance Momentum Score, or earnings-per-share guidance momentum score, is a composite indicator that measures the direction of changes in companies’ earnings expectations. Its core logic is not complicated: it calculates the difference and the ratio relationship between (1) the number of S&P 500 constituent companies that raise their future earnings expectations within a given period and (2) the number of companies that cut those expectations.

This indicator is highly valued by the market because corporate earnings guidance has unique informational value. Unlike forecasts made by analysts using models and public data, when company management issues earnings guidance, it has first-hand operating data such as orders, costs, and capacity utilization. Therefore, directional changes in guidance are often viewed as “leading indicators” that come ahead of actual earnings results.

With this indicator reaching a record high, the number of companies with raised expectations is far greater than those with cut or maintained expectations, and the positive deviation has reached the largest level recorded. This is not an isolated statistical phenomenon—it reflects that a large number of company executives, when making judgments about the operating outlook for the next several quarters, collectively chose a more optimistic path.

Notably, this trend did not suddenly emerge only during earnings season. Since March 31, analysts have continued to raise their earnings forecasts for the S&P 500 index constituents, bringing the cumulative increase in expected earnings for these constituents to 3.4%—the largest upward revision in a single reported quarter since 2021.

Improvement in Earnings Expectations: The Transmission Logic from Guidance to Stock Prices

The improvement in earnings expectations is more analytically valuable than a simple rise in the index because it forms a complete transmission chain from corporate fundamentals to stock price performance.

First, company management raises earnings guidance based on judgments about orders, costs, and market demand. The signal at this step is the most direct—companies themselves believe they will earn more money in the future.

Second, sell-side analysts raise their EPS forecasts based on companies’ guidance. FactSet data shows that as of early July, among S&P 500 constituents, 63 companies had issued positive earnings warnings and 48 had issued negative warnings, with the positive share clearly in the lead. Analysts’ expectations for full-year 2026 operating EPS for the S&P 500 have risen to $340.74, up about 24% year over year.

Third, the upward revisions to EPS forecasts reduce valuation pressure on stocks. Using the current S&P 500 static price-to-earnings ratio of about 25.6x, if EPS grows by 24%, then the forward P/E would naturally fall to a more attractive level. UBS expects full-year 2026 EPS growth of about 20%, and further growth to 12% in 2027, reaching $375.

Fourth, as valuation pressure eases and the earnings outlook becomes clearer, more capital increases stock allocations. This creates a complete logical closed loop—from companies’ micro-level behavior to the market’s macro-level performance.

A Switch in the Logic of U.S. Stock Gains: From the AI Narrative to Earnings-Driven

Over the past two years, the core driver of U.S. stock gains can be summarized as the “AI narrative”—the capital expenditures and commercialization prospects in artificial intelligence for tech giants—driving a systematic expansion in valuations. The S&P 500 has risen more than 10% from 2026 to date, but the tech “Magnificent Seven” index has risen only about 3.2% over the same period. This divergence alone indicates that the market’s rally structure is changing.

What is happening now is an overlay of a second wave of drivers: the growth effect from AI is still continuing, but overall improvement in corporate profits is becoming a broader supporting force. Bloomberg Intelligence data shows that in the first quarter of 2026, nearly 81% of S&P 500 companies achieved year-over-year earnings growth, and earnings breadth reached the highest level since the 2021 pandemic recovery. The first-quarter S&P 500 EPS year-over-year growth rate reached 27%, exceeding the prior expectation by 15 percentage points. The rate of earnings beating expectations was 84%, and the rate of revenue beating expectations was 81%.

This expansion in “earnings breadth” means the market’s rally base is spreading from a small number of tech mega-caps to a wider set of index constituents. In its latest report released in July, Citigroup noted that the “Magnificent Seven,” as a structure used to assess large-cap growth momentum, has “come to an end,” replaced by a “growth cluster” that covers 55% of the S&P 500’s market capitalization and contributes about 48% of earnings. The cluster is expected to see 2026 EPS growth of 42%, which is the core force driving the overall S&P 500’s 24% EPS growth.

At the same time, cyclical sectors are again taking the lead over defensive sectors. The earnings growth of cyclical stocks is ahead of defensive stocks by 14.1 percentage points—higher than 10.1 percentage points a year earlier—and this gap may widen further to 14.9 percentage points. This suggests that the economic cycle itself still has upward momentum.

Earnings Contribution from Tech Giants: From Leading to Co-Building

In the current wave of improving earnings, tech giants such as Nvidia, Microsoft, Alphabet, Amazon, and Meta remain the most important contributors, but their role is shifting from a “sole driving force” to “one of the core driving forces.”

In the first quarter, the tech “Magnificent Seven,” represented by these companies, saw year-over-year earnings growth of 63.2%, the strongest growth rate in nearly four years. However, a more noteworthy change is coming from the other 493 companies in the S&P 500—whose earnings growth is also starting to accelerate in tandem. Excluding the tech “Magnificent Seven,” the expected earnings growth rate for the remaining S&P 500 constituents is about 17%, the fastest pace since the fourth quarter of 2021.

(Beijing time) On July 23, Alphabet released its second-quarter earnings report: total revenue of $119.8 billion, up 24% year over year, exceeding expectations of $117.02 billion; operating profit of $40.77 billion, up 30%; EPS of $9.11. The company also confirmed that full-year 2026 capital expenditures will remain high, expected to be $195 billion to $205 billion—above the prior forecast of $180 billion to $190 billion.

Alphabet, Microsoft, Amazon, and Meta have already forecast total capital expenditures for the 2026 calendar year totaling as much as $725 billion. While such large-scale capital expenditures may suppress free cash flow in the short term, they also represent infrastructure investment for future earnings growth.

It is also worth noting that the earnings growth outlook for tech giants is not without controversy. Some institutions point out that rising costs for AI companies, uncertainty about technology demand, and low investment-to-output conversion efficiency could lead to actual profits falling short of expectations. In addition, some analysis suggests that the EPS growth rate of the “Magnificent Seven” may slow to 20% in 2026 and further decline to 15% in 2027.

Risk Warning: An Asymmetric Game Under High Expectations

A record high in earnings guidance is a double-edged sword. It both confirms an improving trend in corporate fundamentals and also implies that market expectations have already been raised significantly.

Currently, the year-over-year growth in S&P 500 earnings forecasts exceeds 20%, the fastest pace in nearly four years, but the median earnings growth at the company level is only 8%—the divergence is mainly caused by a small number of mega-cap technology companies. This means the market’s margin of error has become extremely limited: if achieving the overall growth rate depends on a small number of companies delivering outstanding performance again, then if any one of them performs weakly, it could undermine the rally foundation built on earnings expectations.

In its July 20 report, Loomis noted that because investors have been raising expectations almost daily as they enter this earnings quarter, the market is in an “unsettling asymmetric situation”: even ideal results may not necessarily be rewarded, but any results that miss expectations will be punished severely.

In addition, the valuation level implied by the current S&P 500 index level is not low. As of early July, the S&P 500’s stock price was at the 95.9th percentile since 1950, and EPS was at the 99.6th percentile. Although Yardeni Research maintains its year-end S&P 500 target of 8,250 points, it also acknowledges that it is “hard to imagine there could be more upside surprises beyond expectations.”

Conclusion

With S&P 500 companies’ earnings guidance rising to an all-time high, it is one of the most important fundamental signals in the current U.S. stock market. It indicates that companies’ collective expectations for future earnings are improving systematically, and that this improvement is spreading from tech giants to a wider range of constituents.

Improving earnings expectations does not automatically translate into a continued rise in stock prices—since the market has already priced in a substantial portion of optimistic expectations. But it does change the structure of the U.S. stock rally logic: from an “AI narrative” driven by valuation expansion to a “fundamentals” rally supported by earnings growth. For investors, this means shifting attention from “what story the market is telling” to “how much money companies actually earn.”

The upcoming earnings season will be a key window to validate this logic shift. Earnings guidance has set a high bar, and the market is waiting for companies to clear it with actual performance.

FAQ

Q1: What is the EPS Guidance Momentum Score? Why is it more important than index up/down moves?

EPS Guidance Momentum Score is an indicator that compares the number of S&P 500 component companies that raise versus cut earnings expectations. It reflects forward-looking judgments by company management based on internal operating data, and therefore better captures the true direction of company fundamentals than the up-and-down moves of an index. With the indicator currently at an all-time high, it means many companies are simultaneously optimistic about the outlook for future earnings.

Q2: How does improving earnings expectations affect stock prices?

Improving earnings expectations triggers a transmission chain: companies raise guidance → analysts increase EPS forecasts → valuation pressure measured by P/E eases → funds increase stock allocations. This process shifts the market’s rally logic from “valuation expansion” to “earnings support,” giving the rally a stronger fundamentals base.

Q3: Has the momentum for U.S. stock gains already switched from AI to earnings-driven?

A switch is underway, but not a complete replacement. AI is still an important driver, but overall improvement in corporate profits is becoming a broader support. In the first quarter of 2026, 81% of S&P 500 companies achieved year-over-year earnings growth, and earnings breadth reached the highest level since 2021, indicating that the rally base is spreading from a small number of tech giants to a wider set of constituents.

Q4: Does a record high in earnings guidance mean U.S. stocks will definitely keep rising?

Not necessarily. High expectations imply low tolerance for disappointment—the market has already priced in a large amount of optimism, and any performance that fails to meet expectations could lead to severe punishment. Current S&P 500 valuations are at a historical high, and earnings need to continue to be delivered to support the current levels. Improving earnings guidance is a necessary condition, but not a sufficient one.

Q5: Which companies are driving earnings growth in the S&P 500?

Tech giants such as Nvidia, Microsoft, Alphabet, Amazon, and Meta remain core contributors, but the other 493 S&P 500 companies are also seeing accelerating earnings growth. Citigroup points out that the “growth cluster” (covering 55% of market capitalization) is expected to grow 2026 EPS by 42%, making it the main force driving overall index earnings growth.