For those of you who would prefer to listen:
Earnings Season is coming to an end. Corporate America has turned in their report cards for Q4, which closes the books on 2025. Over 95% of the S&P 500 companies have reported. The results have been good. In fact, they’ve been outstanding.
The blended year-over-year earnings growth rate for the S&P index of the 500 largest American companies is 13.2%. That marks the fifth consecutive quarter of double-digit growth. It’s been exceptional.
The growth has largely been driven by the Tech Titans. The top 7 companies, often referred to as the Magnificent 7, grew earnings by 22%. Importantly, the other 493 showed a healthy increase with a growth rate of 9%. A large contribution came from the Financials and Health Care sectors. Energy was the only sector to report an earnings contraction. That was largely due to lower Oil prices compared to 2024. That said, Energy has been the best-performing sector in 2026, by a wide margin.
AI demand remains white hot. That was evident in Nvidia’s earnings report. The most valuable company in America, the leader in AI, delivered another record revenue quarter with earnings up a whopping 94% compared to a year ago. Nvidia’s revenues were up 73%. Data center revenue rose 75%. The energy required to power the data centers is under strong demand too.
Nvidia Founder and CEO Jensen Huang continues to forecast a vision of disruption, efficiencies and profitability in the AI revolution. Huang said, “As AI agents come into wider use, being able to quickly generate the computing tokens to operate them, customers have realized their capital spending on Nvidia’s products leads to faster growth.” The aggressive spend has been an issue for the Market of late. Investor concerns of overspending, a lack of return on the investment and an ultimate slowdown have stalled the AI trade. Silicon Valley keeps moving full speed ahead, while the Market has put the brakes on some of the optimism.
Another Nvidia big beat and raise wasn’t enough to move the stock higher, nor the rest of Tech. Nvidia couldn’t save the rally…again. The AI trade has been in correction mode. But companies are benefiting while their stocks correct. The fundamentals are catching up to last year’s rally. But the growth is real. Dell said AI has transformed the company. It used to be a dominant player in PCs back in the Dot-com days. The insatiable demand for servers and data centers has Dell delivering again.
The investment is indeed massive. Nearly $700 Billion is being spent this year on AI. Much of that is going to Nvidia. The biggest buyers of Nvidia’s chips are the Tech Titans. It’s namely Microsoft, Google, Amazon and Meta. Oracle and ChatGPT owner OpenAI are also big Nvidia customers. These iconic American companies are not afraid to aggressively invest. The Bulls see sustainable growth through innovation. The Bears remember the overspending in the Dot-com days, which led to the inflated bubble, then burst. The internet indeed changed everything. But not all of those high-flying Tech stocks survived. Those that did felt the gravitational pull of reality which created the hard reset. Corrective price action is designed for just that. The Market is used to these Bull/Bear debates.
Corporate profitability is as high as ever. Net profit margins for the S&P 500 in aggregate hit an annual average of 12.9%. That’s record levels. The increased profitability is a clear reflection of corporate efficiency and the impact of AI integration on productivity. It’s coming at the expense of many jobs. There have been Tens of Thousands of layoffs in recent months. Much of it coming from Silicon Valley, but certainly not alone.
Block, the San Francisco payment company formerly known as Square, just announced it is cutting nearly half of its workforce. Explaining the announcement, management said: “We are choosing to shift how we operate at a time when our business is accelerating, and we see an opportunity to move faster with smaller, highly talented teams using AI to automate more work.” This trend is gaining traction. Corporate America is finding efficiencies and increased profitability with Artificial Intelligence tools. Innovation has long been a job replacer. Machines and tools have always enhanced or replaced human labor since the beginning of time. The difference now is that machines are not just replacing human labor. For the first time in human history, AI seems to be replacing the need for human brains.
Back to the Market:
Corrective price action continues. It’s working. The Stock Market is not as expensive as it was last year. Valuations keep shrinking while earnings grow. The S&P 500 is now trading at 22x this year’s earnings estimates and 19x next. That’s a decent clip from the 25x and 22x respectively priced for much of last year. Investor sentiment is far from enthusiastic, too. It’s precisely what corrections are designed to do. There’s nothing like price to change sentiment.
If you watch it every day, the Stock Market looks pretty choppy and volatile. But with a wider lens, looking back to October, it’s actually been quite smooth and flat. The sideways S&P movement is like a swimming duck. Above the surface, you see gradual if not graceful, movement. Below the surface is feverish activity. The Tech declines have been matched by rallies in Industrials, Energy and Consumer Staples. These are generally the more cyclical and value-oriented sectors. Estimates for 2026 are for an acceleration. The Street is modeling 14% earnings growth with Tech again leading the charge. The Tech Titans are expected to grow earnings by 23%. But the other 493 companies in the S&P 500 are expected to report growth of 12.5%. That would be a significant jump from their 2025 results.
Now that Earnings Season is coming to a close, the calendar quickly shifts towards Baseball Season. Opening Day is just around the corner. Like the Stock Market, Major League Baseball has a history of domination by Titans too. The Yankees are the obvious ones, with 27 World Series titles in their storied history. The Bronx Titans had a stretch run in the 1990’s, which coincided with the Dot-com days. The 2020’s have clearly been dominated by those highly paid Titans in Chavez Ravine. The Dodgers have been champs during the AI craze.
Bigger isn’t always better. To be sure, throughout history Titans have had their day. But it’s not always been that way. The 2010’s saw 3 rings won at 3rd and King by a young, homegrown value-oriented start-up of sorts. Those San Francisco Giants were always underdogs. They overachieved while the Titans overpaid. That was a healthy correction in baseball. Competition, Execution, price discovery and true value. That’s the Market’s way. It’s forward-looking. It seeks untapped value while targeting the vulnerabilities and excesses. It keeps things honest. That’s what corrections are designed to do.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
