We thought earnings would impress in 2026, but the first quarter reports were even stronger than we expected. With approximately 94% of S&P 500 companies reporting through May 21st (source: Bloomberg), revenues increased 11.14% year-over-year and earnings increased 27.47%. These figures far exceeded analysts’ expectations. Revenues were 1.99% above estimates, while earnings were 16.31% higher than forecasts. Companies tend to give guidance they know they can beat. Still, the performance in the first quarter was more consistent with data you see coming out of a recession, rather than a mid-cycle growth pickup.
And it is not just technology. The earnings growth was broad-based, with nine out of eleven GICS Sectors seeing revenue increase at least nine percent and eight sectors seeing earnings grow at least thirteen percent (Source: Bloomberg). The only sector that had earnings that declined was energy; an outcome likely to change over the remainder of the year, given higher oil prices.
Overall, corporate results remain strong despite rising inflation, slightly higher interest rates, and weak consumer confidence. Thanks to these strong results, the forward P/E ratio of the S&P 500 has declined, even as the index gained 8.77% through May 21st (Source: Bloomberg).
Valuations do still give us pause, but if earnings continue to grow at a double-digit pace, markets are unlikely to suffer a prolonged decline. Our main concern is inflation, which has begun to trend higher. If that persists, tighter financial conditions may be required to bring it under control. Until then, we remain cautiously optimistic.