Earnings Beats Pile Up as AI Spending Lifts Tech; Indexes Hit Records but Reactions Stay Muted

Wall Street’s first-quarter earnings season is off to a stronger-than-expected start, helping propel U.S. stock indexes to fresh records even as investors gauge geopolitical risks. Nearly 90% of S&P 500 companies reporting so far have surpassed estimates, according to FactSet Research, with earnings beats also larger than usual.

FactSet’s data show that the share of companies topping expectations is running well ahead of the 10-year average of 76%. On aggregate, earnings have exceeded estimates by nearly 11%, compared with a decade-long average of 7%. Technology has been the standout.

S&P 500 tech companies that have reported so far grew earnings by 45%, more than double the pace of the next-strongest sector. Robust demand tied to artificial intelligence is a major driver: Taiwan Semiconductor Manufacturing Co. reported "extremely robust" AI chip demand, while chipmaking equipment supplier ASML posted better-than-expected results.

The upbeat tone has extended beyond individual reports. Analysts have increased their estimates for technology-sector earnings by about 5% since the end of January, according to a recent BCA Research report. Only energy has seen larger upward revisions, with higher oil prices expected to provide a lift.

BCA added that gains are broad-based, with 80% of tech stocks seeing positive revisions over the past three months. At the same time, Bank of America says rising earnings expectations are being fueled by surging capital spending plans among Big Tech. The bank estimates forecasts for 2024 capital expenditures at five major hyperscalers—Alphabet, Microsoft, Amazon, Meta and Oracle—have risen by 25% since the start of the year.

Those companies are now expected to invest $680 billion this year, up 63% from last year, according to the bank. Despite the strong numbers, share-price reactions have been subdued. Bank of America reports that companies delivering top- and bottom-line beats performed about in line with the broader market last week.

Historically, stocks have outpaced the market by roughly 1.4 percentage points after a double beat. “It’s early, but muted reactions to beats suggests that solid 1Q results alone are insufficient, that big moves on geopolitics have subsumed earnings results, and guidance is more important,” wrote Savita Subramanian, the firm’s head of U.S.

equity and quantitative strategy. Investors were braced for a strong season, but the war in Iran has generated a cloud of uncertainty since early last month. Last week’s reports arrived amid surging optimism that an end to the war in Iran, and the largest oil supply shock in history, may be in sight.

Even so, major indexes pushed higher. The S&P 500 closed at a record for a third straight session on Friday, and the Nasdaq logged its longest winning streak since 1992. Stocks edged lower on Monday, but the sharp rebound from recent lows may set a higher bar for results and guidance in the weeks ahead.