On July 23, according to Bloomberg data, the S&P 500 constituent companies’ EPS Guidance Momentum Score reached an all-time high. The proportion of companies raising their earnings forecasts far exceeds those lowering or maintaining their outlook, marking the largest positive deviation on record.
This data carries exceptional significance in the context of earnings season. Corporate earnings guidance—management’s forward-looking assessment of future profitability—is typically viewed as a signal with more "insider information content" than analyst forecasts. When a large number of companies simultaneously choose to raise, rather than lower, their guidance, the message goes far deeper than simple index point movements: companies themselves are systematically becoming more optimistic about future profits.
For US equity investors, this signal is crucial because it may indicate a fundamental shift in market drivers—from a valuation-expansion-driven "AI narrative rally" to a profit-growth-driven "fundamentals rally." This article will start with the EPS Guidance Momentum Score, break down the current reality of US corporate earnings expectations, and analyze the structural implications for the US equity market going forward.
Overview of the EPS Guidance Momentum Score
The EPS Guidance Momentum Score is a composite indicator that measures the directional change in corporate earnings expectations. The core logic is straightforward: it tallies, over a given period, the number of S&P 500 companies raising future earnings guidance versus those lowering guidance, as well as the ratio between them.
This indicator attracts significant market attention because corporate earnings guidance carries unique informational value. Unlike analyst forecasts, which are based on models and public data, company management has access to real-time operating data—orders, costs, capacity utilization—when issuing guidance. As a result, changes in guidance direction are often seen as a "leading indicator" ahead of actual earnings reports.
The current record high in this indicator means the number of companies raising guidance far exceeds those lowering or maintaining it, resulting in the largest positive deviation ever recorded. This is not an isolated statistical anomaly—it reflects a collective shift among corporate managers, who are now choosing a more optimistic outlook for the coming quarters.
It’s also worth noting that this trend didn’t just appear during earnings season. Since March 31, analysts have steadily raised earnings forecasts for S&P 500 constituents, resulting in a cumulative 3.4% upward revision in aggregate earnings expectations—the largest single-quarter increase since 2021.
Improving Earnings Expectations: The Transmission Mechanism from Guidance to Stock Prices
The improvement in earnings expectations is more analytically valuable than a simple index rally because it forms a complete transmission chain from corporate fundamentals to stock price performance.
First, company management, based on their assessment of orders, costs, and market demand, raises earnings guidance. This is the most direct signal: companies themselves believe they can earn more in the future.
Second, sell-side analysts respond to corporate guidance by raising EPS forecasts. FactSet data shows that as of early July, 63 S&P 500 companies had issued positive earnings preannouncements, while 48 had issued negative ones—a clear tilt toward positive outlooks. Analyst expectations for full-year 2026 S&P 500 operating EPS have risen to $340.74, up about 24% year-over-year.
Third, upward EPS revisions reduce valuation pressure on stocks. With the S&P 500 currently trading at about 25.6 times trailing earnings, a 24% EPS increase would naturally bring the forward P/E down to a more attractive level. UBS projects full-year 2026 EPS growth of about 20%, with another 12% increase in 2027 to $375.
Fourth, the easing of valuation pressure and greater earnings clarity together drive increased capital allocation to equities. This forms a complete logical loop from micro-level corporate behavior to macro-level market performance.
A Shift in US Equity Market Drivers: From the AI Narrative to Earnings Growth
Over the past two years, the main driver of US equity gains has been the "AI narrative"—systematic valuation expansion fueled by tech giants’ capital expenditures and commercialization prospects in artificial intelligence. The S&P 500 has gained over 10% so far in 2026, but the Tech Seven index has risen only about 3.2% over the same period. This divergence itself suggests the structure of market gains is changing.
What’s happening now is a second wave of drivers: while AI-driven growth continues, broad-based improvement in corporate profits is becoming a more widespread source of support. According to Bloomberg Intelligence, in Q1 2026, nearly 81% of S&P 500 companies achieved year-over-year earnings growth—the broadest profitability since the post-pandemic rebound in 2021. The S&P 500’s Q1 EPS grew 27% year-over-year, beating prior expectations by 15 percentage points. 84% of companies beat earnings estimates, and 81% beat revenue estimates.
This expansion in "earnings breadth" means the foundation for market gains is spreading from a handful of tech giants to a much broader set of constituents. In its July report, Citi noted that the "Tech Seven" are no longer the sole structural engine of large-cap growth. Instead, a "growth cluster" covering 55% of the S&P 500’s market cap and contributing about 48% of its earnings is taking the lead. This cluster’s EPS is expected to grow 42% in 2026, forming the core driver of the S&P 500’s overall 24% EPS growth.
At the same time, cyclical sectors are once again outpacing defensive sectors. Cyclical stocks’ earnings growth leads defensive stocks by 14.1 percentage points, up from 10.1 points a year ago, and this gap could widen further to 14.9 points. This suggests the economic cycle itself still has upward momentum.
Tech Giants’ Profit Contribution: From Leading the Pack to Building Together
In the current wave of earnings improvement, tech giants such as Nvidia, Microsoft, Alphabet, Amazon, and Meta remain the most important contributors, but their role is shifting from "sole driver" to "one of several core drivers."
In Q1, the Tech Seven posted 63.2% year-over-year earnings growth—the fastest in nearly four years. However, a more notable development is that the other 493 S&P 500 companies are now also accelerating their earnings growth. Excluding the Tech Seven, the rest of the S&P 500 is expected to deliver about 17% earnings growth—the fastest since Q4 2021.
On July 23 (Beijing time), Alphabet released its Q2 earnings: total revenue reached $119.8 billion, up 24% year-over-year and beating expectations of $117.02 billion; operating profit was $40.77 billion, up 30% year-over-year; EPS was $9.11. The company also confirmed that full-year 2026 capital expenditures will remain elevated, projected at $195–205 billion, higher than the previous forecast of $180–190 billion.
Alphabet, Microsoft, Amazon, and Meta together are forecasting total 2026 calendar-year capital expenditures as high as $725 billion. While this massive capex suppresses free cash flow in the short term, it also lays the groundwork for future profit growth.
It’s important to note, however, that the profit outlook for tech giants is not without controversy. Some institutions point to rising AI-related costs, uncertain tech demand, and low conversion efficiency of investments as potential risks to actual profits. Others predict the Tech Seven’s EPS growth could slow to 20% in 2026 and further to 15% in 2027.
Risk Warning: Asymmetric Bets Amid High Expectations
Record-high earnings guidance is a double-edged sword. While it confirms improving corporate fundamentals, it also means market expectations have been raised substantially.
Currently, S&P 500 earnings forecasts are up over 20% year-over-year—the fastest pace in nearly four years—but the median company-level earnings growth is only 8%. This gap is mainly due to a handful of mega-cap tech firms. As a result, the market’s margin for error has become extremely narrow: if the realization of overall growth depends on a few companies continuing to deliver stellar results, any weakness from one of them could undermine the entire rally built on earnings optimism.
A July 20 report from Neuberger Berman noted that as investors raised expectations almost daily heading into this earnings season, the market is now in a "worryingly asymmetric position": solid results may not be rewarded, but any disappointment could be punished severely.
Moreover, the S&P 500’s current valuation is far from cheap. As of early July, the index’s price level ranks at the 95.9th percentile since 1950, and EPS at the 99.6th percentile. Yardeni Research maintains an end-2026 target of 8,250 for the S&P 500, but also acknowledges it’s "hard to imagine many more positive surprises."
Conclusion
The S&P 500’s record-high earnings guidance is one of the most important fundamental signals in today’s US equity market. It shows that management teams are collectively and systematically raising their profit outlook, and this optimism is spreading from tech giants to a broader set of constituents.
Improved earnings expectations do not automatically guarantee continued stock price gains—the market has already priced in much of the optimism. But it does shift the logic of the rally: from a valuation-expansion-driven "AI narrative" to a fundamentals-driven rally supported by profit growth. For investors, this means the focus should shift from "what story the market is telling" to "how much companies are actually earning."
The upcoming earnings season will be a key window to validate this shift in logic. Earnings guidance has set a high bar, and the market is now waiting for companies to clear it with real results.
FAQ
Q1: What is the EPS Guidance Momentum Score, and why is it more important than index movements?
The EPS Guidance Momentum Score compares the number of S&P 500 companies raising versus lowering earnings guidance. It reflects management’s forward-looking judgment based on internal operating data and provides a truer sense of corporate fundamentals than index point changes. The current record high means a large number of companies are simultaneously optimistic about future profits.
Q2: How does improved earnings guidance affect stock prices?
Improved earnings guidance triggers a transmission chain: companies raise guidance → analysts increase EPS forecasts → valuation pressure eases → capital allocation to equities rises. This process shifts the market’s rally logic from "valuation expansion" to "earnings support," providing a stronger fundamental foundation for the market.
Q3: Has the main driver of the US equity rally shifted from AI to earnings growth?
A shift is underway, but it’s not a complete replacement. AI remains an important driver, but broad-based improvement in corporate profits is providing more widespread support. In Q1 2026, 81% of S&P 500 companies posted year-over-year earnings growth—the broadest since 2021—showing that the rally’s foundation is spreading from a few tech giants to a wider range of constituents.
Q4: Does record-high earnings guidance guarantee the US equity market will keep rising?
Not necessarily. High expectations mean low tolerance for disappointment—the market has priced in a lot of optimism, and any earnings misses could trigger sharp pullbacks. The S&P 500 is trading at historically high valuations, and continued profit delivery is needed to support current levels. Improved guidance is a necessary, but not sufficient, condition for further gains.
Q5: Which companies are driving S&P 500 earnings growth?
Tech giants like Nvidia, Microsoft, Alphabet, Amazon, and Meta remain core contributors, but the other 493 S&P 500 companies are also accelerating their earnings growth. Citi notes that the "growth cluster" (covering 55% of market cap) is expected to deliver 42% EPS growth in 2026, making it the main force behind the index’s overall profit gains.
