Second-Quarter Earnings Season Starts Next Week. Here's What to Expect.

The second-quarter earnings season begins next week. As usual, the big banks will kick off earnings season, with the first reports on Tuesday, July 14.

So, what should we expect? After all, share prices ultimately follow earnings. Many factors can move stocks in the short term (wars, oil price spikes, unexpected economic data, or policy moves by the Federal Reserve are a few). But if you want to get a sense of where the stock market is heading in the medium and long term, watching earnings is a great start.

Right now, analysts estimate that S&P 500 (SNPINDEX: ^GSPC) companies' earnings in Q2 will rise 23.3% from the same quarter a year ago. That's according to FactSet, an authoritative source of earnings data. If that estimate proves correct, it would mark the second consecutive quarter of earnings growth above 20% for the index. (Analysts focus on the S&P 500 because it tracks the 500 largest U.S.-listed companies and represents about 80% of the total market capitalization of all U.S. companies.)

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That's impressive, considering that the five-year average earnings growth rate is 16.4% and the 10-year average is 10.3%. And the long-term average growth rate is below 10%.

Analysts have been raising their expectations for Q2 earnings

Analysts have been raising their expectations for Q2 earnings in recent months. On March 31, the estimated growth rate for the S&P 500 was 18.8%. Digging a bit deeper, analysts on average raised their earnings estimates for the energy, communications services, and information technology sectors. They lowered their estimates for healthcare and consumer staples companies.

The increase in analysts' growth estimates for the S&P 500 is due to the 111 companies in the index that issued Q2 earnings guidance: 63 reported positive guidance, i.e., they said their earnings will exceed current Wall Street expectations. That's a larger number than the 48 companies that said their earnings will underperform Wall Street's expectations. Notably, 44 companies in the information technology sector issued positive guidance.

For the full year 2026, analysts expect S&P 500 earnings to increase by 18.9%. Edward Yardeni, a well-respected market and economic analyst, says those growth expectations may be too bullish and that analysts may be entering the realm of irrational exuberance. Yardeni adds that a major risk is that some of the big AI data center companies like Meta Platforms and Alphabet don't beat analysts' overly optimistic earnings growth estimates, which could cause a correction among technology stocks.

That's always the risk, because the stock market prices stocks based on future earnings, usually the next 52 weeks, and the most recent quarterly performance provides a good indication of what those future earnings might be. And right now, expectations are very high.

Matthew Benjamin has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, FactSet Research Systems, and Meta Platforms. The Motley Fool has a disclosure policy.