What to Expect From Q2 Earnings as Tech Strength Broadens

Key Points

• S&P 500 companies posted nearly 29% earnings growth in Q1 2026, far exceeding consensus forecasts, with Q2 results potentially approaching 40% growth.
• Nine of 11 S&P 500 sectors drove Q1 outperformance, with AI spending guidance from Magnificent Seven companies and AMD expected to shape Q2 market sentiment.
• Healthcare is the lone contracting sector, as expiring Affordable Care Act subsidies reduced procedure volumes and impaired earnings, though longer-term growth is expected to resume.

The Q1 2026 earnings reporting season is wrapped up, leaving investors wondering what will happen in Q2. With the season scheduled to heat up by mid-July, the signs point to another quarter of strength.

The result for Q1 was nearly 29% earnings growth among S&P 500 companies, well above the forecast at the start of the season. The S&P 500 typically beats its consensus estimate, but by about 300 to 500 basis points rather than 1,500.

The forecast at the start of the Q2 season is approximately 22% EPS growth; the final tally will likely top 30% and may approach 40%, based on the strength shown in Q1.

Q1 Outperformance Reveals Structural Defect in Market Outlook

It is the magnitude of outperformance that matters now. The index outperformed expectations, doubling the consensus estimate, revealing a fundamental misunderstanding of current conditions and the impact of AI. Current conditions include headwinds, but they are offset by the impacts of Trump’s tax and deregulation agenda. The net result is growth, albeit tepid, underpinned by labor market strength. The May NFP report confirmed signals seen in the jobless claims data, reflecting an accelerating improvement in hiring and labor market conditions overall compared to last year.

As it stands, the forecasts for Q2, Q3, and Q4 are improving, but do not reflect the strength seen in the Q1 reports. This is setting the stage for another quarter of outperformance; the question is by how much? Given that the quarterly strength was driven by nine of 11 S&P sectors, the odds are high it will be comparably strong. Within that, communications, technology, materials, consumer discretionary, and industrials stand out. Each outperformed robustly.

Margin Growth Equals Accelerated Earnings Growth

Margins are a driving force for the market. Average S&P 500 margin improved by 200 basis points year-over-year in Q1, and strength is expected to continue. While rising costs are impacting the outlook, including oil, efficiency gains, including those tied to AI, offset them. This quarter, higher oil prices will underpin margin gains, with energy companies forecasted to grow earnings by 120% YOY. The odds this sector will outperform consensus are also high, as the figure has jumped in recent months as oil prices hover near historic highs.

The communications sector is also expected to be strong. However, the strength was centered on Alphabet NASDAQ: GOOGL and Meta Platforms NASDAQ: META in Q1 and is likely to persist in Q2. The takeaway is that these companies are supported by consumer, communications-like businesses, but they are tech companies and AI-critical hyperscalers at heart.

Earnings From Mag 7 and AMD to Drive Summer Sentiment

While Alphabet and Meta Platforms' results will be catalysts for their respective stocks, guidance and CapEx plans will catalyze the market. The trend is increasing spending, as seen in Oracle’s NYSE: ORCL mid-cycle report, and that is what investors will want to see. Any signs that AI spending is slowing or nearing its peak will be reflected in the S&P 500 index price, most likely as a reset to lower levels.

The tech sector has several catalysts to deliver, including results from Advanced Micro Devices NASDAQ: AMD, the Magnificent Seven, and NVIDIA NASDAQ: NVDA. Advanced Micro Devices is on track to accelerate revenue growth across segments, but its market impact will be seen in guidance and MI450 updates. With MI450 deliveries expected to begin in Q3, AMD’s guidance needs to show strength. The likely outcome is that AMD’s revenue ramps in a similar fashion to NVIDIA’s and other mission-critical AI infrastructure plays. NVIDIA’s results will show another acceleration in systemic AI demand.

Healthcare Stocks Suffering From Legislative Woe

The healthcare sector is the stand-alone weakness, contracting in Q1 and expected to contract in Q2. Expiring Affordable Care Act subsidies triggered a wave of insurance cancellations, coverage losses, and a subsequent drop in procedure volume and health services demand, while costs are rising. The combination impaired both top and bottom-line results for companies across the board.

The healthcare sector performed better than expected in Q1, but earnings contracted despite revenue growth, and guidance was reduced, prompting analysts to lower their Q2 forecasts. Average earnings are expected to contract by a high single-digit amount despite modest top-line growth and may underperform expectations.

The caveat is that price weakness is a buying opportunity in this sector. While near-term headwinds exist, catalysts, including AI, are also in play. Longer-term, earnings growth is expected to resume for most stocks as soon as next year, underpinning a healthy outlook for capital returns. S&P 500 Health Care Sector stocks tend to pay dividends, growth distributions annually, and/or buy back shares.