Wilson of Morgan Stanley sees profit boost beyond tech

The earnings season kicking off this week is expected to show that U.S. stocks beyond the biggest technology companies are posting strong profit growth, broadening the equity rally beyond the usual megacap names. Morgan Stanley strategists led by Michael Wilson said the median company in the S&P 1500 Composite Index is generating earnings-per-share growth of more than 10%, the best performance since the post-Covid recovery period.

Analysts are also upgrading profit estimates for the consumer discretionary and transport sectors, both of which are closely tied to broader economic growth, the strategists noted. “We expect the broadening to continue driven by earnings resiliency from the median stock,” Wilson wrote in a note to clients.

Banks kick off a season with high expectations

The second-quarter earnings season begins Tuesday with reports from the big banks. Analysts expect S&P 500 companies to post a 23% jump in profits, according to data compiled by Bloomberg Intelligence. That would rank among the best readings ever outside of recoveries from major recessions.

That sets a high bar for equity benchmarks trading near their all-time highs. The focus will again be on technology stocks for clues about artificial intelligence demand, and whether the outlook is strong enough to support raised valuations for the semiconductor sector.

Investors are also waiting to hear from the big spenders on AI infrastructure — the so-called hyperscalers. This group has largely missed out on this year’s S&P 500 rally over concerns that hefty capital expenditure may not pay off.

In fact, the equal-weighted S&P 500 index, which reduces the influence of the tech giants, is outperforming the market-capitalization weighted gauge for the first time since 2022. That shift suggests a broader set of companies is driving returns, not just a handful of the largest names.

Tech still draws attention despite broader gains

Some strategists still highlight the strength of tech sector earnings. RBC Capital Markets strategist Lori Calvasina raised the sector to overweight, pointing to strong upgrades in both revenue and earnings estimates as well as a resumption in fund inflows. “Tech valuations admittedly aren’t cheap, but in our latest update the sector is only slightly above the long-term average on median absolute and relative P/E,” Calvasina wrote.

The pattern of earnings broadening beyond tech mirrors a shift that has happened before in market cycles, when investors rotate into sectors that benefit more directly from economic growth. Whether that rotation holds will depend on whether the wider economy can keep pace with the optimism baked into stock prices.