Second-quarter earnings season continues to deliver strong results, with 71% of S&P 500 companies having reported so far. Revenues are exceeding analyst expectations by 3.8% on average, while earnings are outperforming forecasts by 7.3%. Revenue beats have been recorded by 77% of companies, while 83% have surpassed earnings estimates. Notably, this marks the twelfth consecutive quarter in which earnings growth has outpaced revenue growth, highlighting ongoing profit margin expansion.
The outlook for August appears increasingly constructive. A combination of exhausted mean-reversion trading strategies, the collapse of the Situational Awareness hedge fund, and aggressive short-selling activity that fueled negative market narratives has left the market deeply oversold and potentially primed for a strong rebound. Adding to the bullish case, FactSet projects S&P 500 second-quarter earnings growth of 47.4%.
Looking ahead, the Atlanta Fed’s GDP Now model currently estimates third-quarter annualized GDP growth at 5.9%, exceeding the 5% pace forecast earlier this year. However, investors should note that the Atlanta Fed’s estimates often begin at elevated levels before being revised lower as additional economic data becomes available. Second-quarter GDP growth faced pressure from heavy technology imports from Asia, a trend likely to persist as AI-related demand continues to accelerate.
Economic activity also appears to be gaining momentum. The Institute for Supply Management (ISM) reported that its manufacturing index climbed to 55.6% in July from 53.3% in June, marking the seventh consecutive monthly increase and the strongest reading since May 2022. New orders improved to 56.7%, production jumped sharply to 58.5%, and order backlogs rose to 55%. Broad-based strength was evident, with 15 of the 16 manufacturing industries surveyed reporting expansion during the month.
On the labor front, ADP reported that private-sector employers added just 44,000 jobs in July, falling short of the 65,000 jobs economists had expected. The weakest areas included leisure and hospitality, which shed 11,000 jobs, and trade, transportation, and utilities, which lost 8,000 positions. While seasonal factors may have weighed on the report, the softer-than-expected data has prompted economists to lower expectations for the upcoming nonfarm payrolls release.
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