Record profits, huge earnings and the standout stocks from US reporting season

Australian reporting season may have underwhelmed, but it's been a completely different story in the US. 

The Mag 7 naturally stole the headlines, but the numbers were strong across the S&P 500. Net profit margins hit a record and earnings growth was at its best in five years for the S&P 493.

I recently spoke to Laura Hargrove, Investment Analyst in the WAM Global Team (ASX: WGB) on a US reporting season that delivered impressive strength across the board, even as some issues remain bubbling under the surface, and why beats on results didn't always translate into share price gains. 

With 97% of the S&P 500 now reported, headline earnings growth for the quarter came in north of 50%, the strongest since 2021. Looking beyond the headline figure, how much of that growth reflects genuine earnings power?

The US reporting season was one of genuine strength, although the headline number flatters it. The 52% blended growth rate includes roughly US$150 billion of non-operating investment gains at Alphabet (NYSE: GOOG) and Amazon (NYSE: AMZN), driven principally by the revaluation of Alphabet's SpaceX stake following the June listing and Amazon's investments in Anthropic. 

Excluding those two companies, earnings growth was close to 34%, which remains exceptionally robust. Margins support the same conclusion. On this adjusted basis, the index net profit margin reached a record 15.1%, up from 12.9% a year earlier, evidence that companies are converting revenue growth into profit with increasing efficiency.

The Magnificent 7 once again accounted for the majority of earnings growth and now represent a third of the index. Was there anything in these results to suggest the market can broaden beyond them?

Yes, and this was among the more encouraging aspects of the quarter. Outside the Magnificent 7, the remaining 493 companies in the S&P 500 grew earnings by approximately 32%, their strongest result since late 2021.

Importantly, the drivers are diverse rather than dependent on a single theme. Energy benefited from higher oil prices, financials from a steeper yield curve and a revival in deal activity, and industrials from continued infrastructure and reshoring investment. 

The benefits of AI are also increasingly accruing to the businesses that deploy the technology rather than those that build it, supporting productivity across a far wider set of companies. 

At the same time, sectors that have lagged for several years are beginning to recover. Thermo Fisher (NYSE: TMO), the world's largest life sciences tools provider, is a case in point. After a prolonged downturn in biopharma and academic spending, it reported accelerating demand across all major end markets, raised full year guidance and saw its shares rise close to 9% on the day. 

This breadth of earnings drivers provides a more durable foundation for the market going forward.

A notable feature of this season was the number of companies that exceeded expectations yet saw their share prices decline. How do you interpret that reaction, and what does it suggest investors are paying attention to?

This earnings season reiterated that the market is increasingly rewarding capital discipline and returns on investment over headline growth. 

Alphabet illustrates this well. The company delivered a strong quarter, with Google Cloud revenue accelerating 82%, yet its shares declined around 7% after management raised its 2026 capital expenditure guidance towards US$205 billion. 

That level of expenditure resulted in negative free cash flow for the first time in the company's history, and it is this kind of development that has brought the question of financing into focus. The AI build-out has strained balance sheets, leaving hyperscalers increasingly reliant on capital markets and prompting investors to question whether funding at this scale can be sustained.

These concerns should nonetheless be viewed in context. The hyperscalers continue to grow rapidly and generate substantial operating profit, and their contracted backlogs provide tangible evidence that demand for AI infrastructure is being monetised. What has changed is the burden of proof. 

Management teams are now expected to demonstrate a clear path from capital expenditure to cash returns, and as the market discriminates on that basis, we expect greater dispersion in returns across the AI complex. 

Amazon demonstrated just this, with its shares rising roughly 9% despite an increase in capital expenditure guidance comparable to Alphabet's, as a more than 500 basis point year-on-year expansion in the AWS operating margin provided the evidence investors sought.

Drawing on the retail and consumer results, what conclusions can we take from this season regarding the health of the American consumer?

The American consumer is best described as ‘K shaped’, whereby aggregate resilience is masking a widening divergence between affluent households that continue to spend and lower income households that are under visible strain. 

American Express (NYSE: AXP), whose cardholder base is predominantly US-based and skewed towards higher income consumers, reported a fourth consecutive quarter of double-digit revenue growth, supported by premium card fees and travel spending. 

At the other end of the spectrum, Walmart (NYSE: WMT) reported its slowest US comparable sales growth in over six years, with customers prioritising value, and McDonald's (NYSE: MCD) US comparable sales slowed to below 1% on declining guest counts, with management citing pressure on lower income households. 

For investors, the implication is that consumer exposure is no longer a single trade, and positioning within the K matters more than positioning on the consumer itself.

Companies delivered these results with the Fed on hold and hikes now being priced. How did rate sensitivity show up in the numbers, and what does a Warsh Fed mean for earnings?

Interest rates were a clear point of differentiation this season, with financials and residential housing at opposite ends of the spectrum. Financials benefited from a steeper yield curve and a revival in capital markets activity. Housing, by contrast, remained constrained by elevated mortgage rates, with affordability continuing to weigh on demand and new home prices declining year over year. Such divergence is likely to persist. 

Under Warsh, the Fed has moved away from forward guidance in favour of a more discretionary, data dependent approach, and market expectations have shifted from anticipating cuts to pricing the possibility of hikes. This is significant given that earnings forecasts have largely been predicated on monetary support. 

As that prospect recedes, the advantage moves towards businesses with strong balance sheets and pricing power, and away from those dependent on lower rates or facing refinancing. 

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