Is the Worst Finally Over for Palantir Stock?

Just a few months ago, it seemed like every piece of good news pushed Palantir Technologies (NASDAQ: PLTR) stock lower.

The company kept reporting strong results. Demand for its artificial intelligence (AI) software continued to accelerate. Yet investors remained unimpressed. But something changed recently. After another blockbuster earnings report, Palantir stock surged rather than sank.

That doesn't necessarily mean the correction is over. But it may be the market's first signal that investor sentiment is beginning to change.

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It wasn't just a great quarter, but how the market reacted to it

Palantir's second-quarter results were outstanding by almost any measure.

Revenue surged 93% year over year to $1.9 billion, while U.S. commercial revenue jumped 149% as more enterprises adopted its Artificial Intelligence Platform (AIP). Management also raised its full-year revenue guidance again, now expecting approximately 82% growth in 2026. Those numbers suggest the company's momentum is still accelerating, not slowing.

But here's what caught my attention: for months, investors responded to good news with skepticism. Strong earnings weren't enough because many believed the stock had simply become too expensive.

This time, the market reacted differently. Instead of focusing on valuation, investors rewarded Palantir's execution with a roughly 25% surge in its share price following the earnings release. That shift may be more important than the earnings themselves, as it may signal a change in investors' perception of the stock.

Why the shift in investors' sentiment matters

Experienced investors don't just study financial results. They also study how the market responds to those results. When great earnings fail to lift a stock, it often signals expectations are still too high. That was the situation that Palantir had been facing in the last few quarters.

But when the same kind of earnings suddenly trigger a strong rally, it can suggest much of the pessimism has already been priced in. That's not a guarantee the bottom is in, since share prices rarely move in straight lines.

But it can be an early sign that sellers are becoming exhausted and buyers are beginning to regain conviction.

In other words, the biggest change after Palantir's latest earnings wasn't necessarily the business. It was investor behavior.

The business continues to strengthen

The market's reaction would mean very little if the underlying business were deteriorating.

Fortunately for shareholders, the opposite appears to be happening. Twelve months ago, investors were still debating whether enterprise demand for Palantir's AI platform would prove durable.

Today, that's unlikely to be the focus. Commercial customers are adopting the platform at a faster pace, revenue growth has accelerated from 85% in Q1 to 93% in Q2, and profitability hit a new record.

What's more, Palantir demonstrates that a company can grow rapidly even though it is already a giant by all measures. CEO Alex Karp even hinted that this is probably just the beginning of its longer-term growth.

Still, that doesn't mean the stock is cheap

The improving sentiment doesn't eliminate the biggest risk, that Palantir still commands a premium valuation as investors expect years of exceptional growth. For perspective , Palantir trades at a price-to-sales (PS) ratio of 66 times.

That's both the opportunity and the challenge. If the company continues delivering quarters like its latest one, today's valuation could eventually prove reasonable. But if growth slows materially, investors could once again question whether the premium valuation is justified.

In other words, the central debate on Palantir's stock is not whether Palantir has a great business. The evidence increasingly suggests it does. The real question is whether that business can continue outperforming the lofty expectations already embedded in the stock price.

What does it mean for investors?

So, is the worst finally over for Palantir stock? No one can answer that with certainty.

On one level, investors' sentiment has clearly improved since the Q2 earnings result.

Still, one quarter is likely too short a time for investors to make a call on the arrival of a new trend. Besides, the stock still trades at a sky-high valuation.

But if Palantir continues delivering exceptional results -- and the market continues responding positively -- it could suggest the recent correction over the last few quarters was less the beginning of a prolonged decline, and more a healthy reset in expectations.

For long-term investors, that's the signal worth watching in the coming quarters.

Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.