The Big Picture

Briefing.com Summary:

*S&P 500 Q1 earnings growth has surged to 27.2%, with broader sector contributions beyond technology.

*Earnings and sales growth have broadened, supporting continued market momentum despite macro concerns.

*Elevated valuations look justified given robust EPS growth, keeping the CY26 PEG near 1.0 and limiting overvaluation concerns.

We would like to take this moment to reflect on something very important to the stock market: earnings growth.

We would not normally do so at this point in a reporting period, which is only 63% complete in terms of S&P 500 companies that have reported their first quarter results, but we cannot stay silent when there has been such a dramatic change in the earnings reporting.

This period has not been good. We repeat: it has not been good.

It has been great!

More Than a One-Hit Wonder

Briefing.com penned a preview on April 10. At that time, the first quarter blended growth rate, which incorporates actual growth rates for companies that have reported and estimates for companies that have yet to report, stood at 12.5%.

The information technology sector was projected to account for 10.2 percentage points, or 82%, of the overall growth rate. The financial sector effectively accounted for the balance of the projected growth rate.

The rest of the lot didn't have much to contribute, if anything at all. The health care, communication services, and energy sectors were expected to detract 1.17 percentage points, 0.49 percentage points, and 0.17 percentage points, respectively.

So, here we are three weeks later, and the blended first quarter growth rate is up to 27.2%, according to FactSet. What is more is that the information technology sector is accounting for less than half that growth rate.

That doesn't mean the information technology sector has been a disappointment. Its results have been better than expected, with a blended growth rate of 49.9% versus 44.4% on April 10. Its contribution has increased to 11.5 percentage points. 

The salient point is that the earnings growth in other sectors has been much better than expected. The biggest change belongs to the communication services sector. Thanks primarily to Alphabet (GOOG/GOOGL), Meta Platforms (META), and Netflix (NFLX), the sector is contributing 6.63 percentage points to the overall growth rate. Other key contributors include the financial (3.93 percentage points), consumer discretionary (2.98 percentage points), and industrials (1.44 percentage points) sectors.

The health care (-0.60 percentage points) and energy (-0.15 percentage points) sectors are still detractors, but less so than previously expected.

Importantly, the first-quarter reporting period has demonstrated that the earnings growth is not a one-hit wonder, nor is the sales growth. The blended sales growth rate sits at 11.1% versus 9.7% on April 10. All 11 sectors are delivering sales growth. The information technology sector is the biggest contributor at 3.39 percentage points, but that is only 30% of the total growth rate.

PEGging a Valuation

The terrific earnings news does not stop at the first quarter. That, too, is a key consideration for a market trading at a valuation that is considered lofty at 21.1x forward twelve-month earnings, which is a 12% premium to the 10-year average, according to FactSet.

There shouldn't be a revolt at that valuation, though, so long as the guidance is delivering and interest rates are behaving.

The latter have been creeping higher, but relative to the 76% year-to-date increase in oil prices, a 3.5% inflation rate for the PCE Price Index, concerns about the size of the national debt, and the pricing out of any rate cuts this year, the 10-yr note yield at 4.37% can be deemed remarkably well-behaved.

Leaving that aside, one can't cast too many aspersions on the P/E multiple, not when the projected EPS growth rate is as strong as it is and has yet to be called into real question by a battery of key earnings warnings.

With the robust first-quarter results and a projected growth rate of 21.5% for the second quarter, the calendar year 2026 EPS estimate has increased from $308.61 at the end of 2025 to $328.07 today, up 21% from CY25.

That computes to a CY26 P/E multiple of 22.1x, but when factoring for the EPS growth rate, you get a current PEG ratio of just 1.05. The market, then, is not as overvalued as one might think, although it is overbought on a short-term basis and due for a pullback.

Briefing.com Analyst Insight

It is the earnings news and the earnings trend that has enabled the stock market to rally the way that it has in the face of rising oil prices and the uncertainty of the Iran War.

Granted, there is a potential earnings headwind looming the longer the Strait of Hormuz remains closed, yet the market hasn't found reason to fear that condition because it hasn't been rattled at all by the earnings guidance narrative to this point.

The earnings story so far in 2026 is a great one, and the market is running with it, as it should be. When that narrative changes, the trend will shift. For now, though, all hail the impressive and broadening earnings growth—the key to the stock market's continuing good fortune.

--Patrick J. O'Hare, Briefing.com