The Q1 2026 earnings reporting season is wrapping up, leaving investors wondering what will happen in Q2. With the season set to heat up in mid-July, signs point to another strong quarter.
The Q1 result was about 29% earnings growth among S&P 500 companies, more than forecast at the beginning of the season. The S&P 500 typically beats its consensus average, but by 300 to 500 basis points rather than 1,500.
The forecast at the beginning of the Q2 season is about 22% EPS growth; the final figure will likely be as high as 30% and may reach 40%, based on the strength shown in Q1.
Q1 Outperformance Reveals Structural Flaw in Market Outlook
It's the size of the superpower that matters now. The index performed better than expected, doubling the consensus rating, revealing a misunderstanding of current conditions and the impact of AI. Current conditions include storms, but are offset by the effects of Trump's tax and resignation agenda. The result is growth, albeit modest, supported by the strength of the labor market. The May NFP report confirmed the signs seen in the jobless claims data, showing a faster improvement in employment conditions and the overall labor market compared to last year.
As it stands, forecasts for Q2, Q3, and Q4 are improving, but do not reflect the strength seen in Q1 reports. This sets the stage for another quarter of outperformance; the question is how much? Given that the quarter's strength was driven by nine of the S&P's 11 sectors, the upside is likely to be relatively strong. Within that, communications, technology, materials, consumer choice, and industries stand out. Each worked hard.
Margin Growth Equals Faster Earnings Growth
Margins are the driving force of the market. The S&P 500's average margin improved 200 basis points year over year in Q1, and the momentum is expected to continue. While rising costs impact visibility, including oil, efficiency gains, including those tied to AI, offset themselves. This quarter, higher oil prices will support margin gains, with energy companies forecast to grow earnings by 120% YOY. The likelihood of the sector outperforming consensus is high, as the value has risen in recent months as oil prices have risen near historic highs.
The telecommunications sector is also expected to be strong. However, the power was concentrated in Alphabet NASDAQ: GOOGL again Meta Platforms NASDAQ: META in Q1 and is likely to continue in Q2. The takeaway is that these companies are backed by consumers, businesses like telecommunications, but are technology companies and AI-critical hyperscalers at heart.
Benefits From Mag 7 and AMD to Drive Summer Emotions
While the results of Alphabet and Meta Platforms will be the stock's catalysts in themselves, the guidance and CapEx plans will boost the market. The trend is increasing spending, as seen in Oracle's NYSE: ORCL mid-cycle report, and that's what investors will want to see. Any signs that AI use is slowing or about to decline will be reflected in the price of the S&P 500 index, most likely as a reset to lower levels.
The technology sector has several catalysts to deliver, including emerging markets Advanced Micro Devices NASDAQ: AMDthe Magnificent Seven, and NVIDIA NASDAQ: NVDA. Advanced Micro Devices is on track to accelerate revenue growth in all segments, but its market impact will be seen in the direction and revision of the MI450. With MI450 deliveries expected to begin in Q3, AMD's guidance needs to show strength. The likely result is that AMD's revenue jumps in line with NVIDIA's and other major AI infrastructure plays. NVIDIA's results will show another acceleration of the system's AI demand.
Health Care Stocks Suffer from Legal Trouble
The healthcare sector is the weakest sector, contracting in Q1 and expected to contract in Q2. Expiring Affordable Care Act funding has created a wave of insurance cancellations, loss of coverage, and decreased procedure volume and demand for health services, while costs have risen. The combination has hampered both top and bottom results across companies.
The healthcare sector performed better than expected in Q1, but earnings contracted despite revenue growth, and guidance was lowered, prompting analysts to lower their Q2 forecasts. Average earnings are expected to decline by a high single-digit rate despite moderate top-line growth and may beat expectations.
A warning that price weakness is a buying opportunity in this sector. While there are near-term headwinds, catalysts, including AI, are also at play. Longer term, earnings growth is expected to resume in many stocks as soon as next year, supporting a healthy outlook for capital returns. Stocks in the S&P 500 Health Care Sector tend to pay dividends, grow annual distributions, and/or buy back shares.
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