S&P 500 Earnings Surge 45% as Positioning Cleans Up for New Highs

Woofun AI reports that the S&P 500 is poised to reach a new historical high this year, a trajectory anchored by robust earnings growth and a significant cleanup in market positioning, according to Goldman Sachs partner John Flood.

The core driver of this bullish thesis is the exceptional performance of second-quarter earnings per share (EPS), which expanded by 45% year-on-year. This figure dramatically outpaced the consensus expectation of 22% established at the beginning of the quarter, signaling a fundamental strength in corporate profitability that exceeds analyst forecasts.

A critical component of this growth involves non-recurring income streams, specifically approximately $151 billion in "other income" derived from equity investments by major tech firms such as Alphabet and Amazon. These one-time gains contributed 19 percentage points to the overall growth rate, highlighting the substantial impact of capital gains on reported earnings figures.

Even when stripping away these non-core income sources, the underlying EPS growth rate remains robust at 26%, accelerating from the first quarter and marking the fastest pace since 2021. Microsoft also contributed to this non-core income with approximately $3 billion, further illustrating how large-cap technology firms are leveraging their balance sheets to boost reported earnings beyond operational cash flows.

The breadth of this earnings improvement extends beyond headline numbers, with the median year-on-year EPS growth among S&P 500 constituents reaching 12%. This median figure surpassed the initial quarter consensus of 9%, indicating that the profitability surge is broad-based across the index rather than being solely concentrated in a few tech giants.

Looking forward, analysts have begun upgrading earnings expectations for 2027, with the consensus forecast for the S&P 500 rising by about 1% since the start of the third quarter. The energy and financial sectors have seen the largest upward revisions, suggesting that the positive earnings momentum is spreading across diverse industry verticals.

Woofun AI data shows that market sentiment indicators have retreated to the 53rd percentile, with the NAAIM index for actively managed funds dropping to 79.7.

This shift reflects a bearish turn in rapid positioning metrics, as futures positioning cools from extreme levels and investor surveys indicate a decline in optimistic sentiment.

Deleveraging trends are particularly pronounced among hedge funds, which have given back half of their year-to-date leverage gains, while net leverage has decreased since the beginning of the year. Retail investor leverage is also cooling, evidenced by margin balances in the South Korean stock market retreating from historical highs and financing purchases in Japan pulling back from levels not seen since 1990.

From a valuation perspective, U.S. stocks remain relatively "cheap" compared to other major global markets, providing a margin of safety for further upside. John Flood emphasizes that the AI supercycle has yet to fully release its dividends, as the world's largest tech companies continue to increase capital investments, thereby expanding the breadth and depth of earnings improvement.

However, seasonal risks persist, as historical data since 1974 shows that in 13 midterm election years, the median S&P 500 return from early August to election day was 0%. This historical pattern introduces uncertainty regarding the timing of new highs, even as the underlying earnings outlook provides strong support for the bulls.