Earnings: What I Expect To Hear And How Markets Could React

The second quarter earnings reporting season begins next week. The big risk ahead is that technology companies, especially the hyperscalers, won't beat analysts' overly optimistic earnings growth estimates for the quarter. That could cause a correction among tech stocks

But the overall stock market might dodge a correction if investors rotate into sectors that have lagged and that report better-than-expected earnings. We are in the rotation camp for the stock market's outlook up ahead.

The major banks will report at the end of next week. We expect they will beat expectations by reducing their bad-loan provisions. In addition, loan demand has been growing faster in recent weeks, and the IPO calendar has been busy.

The problem is that industry analysts may be projecting a hard-to-beat earnings outlook in 2026 and 2027. They are projecting that S&P 500 Index (SPX) earnings per share will increase 18.9% this year to $342.17 and 17.8% next year to $402.96.

Both numbers exceed our forecasts of $330 and $375. We've been bullish on earnings, but perhaps not bullish enough. Or else the analysts are entering the realm of irrational exuberance.

Overall, the stock market may be starting to rotate in anticipation of the risks of the upcoming earnings season. While the S&P 500 market-weight stock price index has stalled in recent weeks, the S&P 500 equal-weight index just made new record highs.