Tech steals the Q2 earnings show

The Q2 S&P 500 earnings reporting season has been fair-to-good so far, from our vantage point.

Earnings are on pace to grow 10.4 percent year over year (y/y), well above the 2.8 percent consensus estimate just before the reporting season began, according to Bloomberg Intelligence data.* While this is lower than the previous two quarters, it’s a good, above-average growth rate. However, much of the Q2 growth is tilted toward two sectors which house large technology and artificial intelligence (AI) stocks: Information Technology and Communication Services, both of which are pacing at over 20 percent y/y growth.

A little over 81 percent of firms have exceeded the consensus earnings growth forecast, above the 75 percent average since 2014. A diverse group of sectors has the highest beat rates: Information Technology, Real Estate, and Health Care. Conversely, the lowest beat rates are in the Materials, Energy, Utilities, and Consumer Discretionary sectors.

Revenues are on pace to climb 6.3 percent y/y versus the 4.0 percent pre-reporting season consensus forecast. But the bulk of the Q2 outperformance is coming from the Information Technology sector with its unusually high 22 percent y/y revenue growth rate. The only other sector posting double-digit revenue growth is Health Care, although the Communication Services, Financials, Real Estate, and Utilities sectors are also pacing above the 4.8 percent average since 2014.

The full-year 2025 and 2026 consensus earnings forecasts have nudged up to $270 per share and $303 per share, respectively. Even though we question whether these levels will ultimately be achieved due to potential economic headwinds associated with tariffs, the uptick to estimates indicates Wall Street analysts as a group still view future earnings prospects positively.

There are some additional caveats to the earnings season.

The expectations bar had been lowered a lot in the months leading up to this reporting season as consensus estimates came down – although this often happens.

Furthermore, RBC Capital Markets, LLC Head of U.S. Equity Strategy Lori Calvasina pointed out that management teams’ comments on earnings conference calls have reflected the lackluster levels of corporate confidence in recent CEO and CFO surveys. After reviewing numerous earnings call transcripts, she remarked that “we have a long way to go to understanding how the recent changes in trade policy will impact demand and 2026 outlooks.”

Tech and non-tech earnings convergence pushed out – again

A key earnings story, in our view, is the duration of the ongoing disparity between technology-related firms and non-tech firms.

This can clearly be seen when comparing the AI-leveraged so-called Magnificent 7 stocks (Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla) to non-Magnificent 7 stocks.

As a group, Magnificent 7 earnings growth has come down substantially – partly due to difficult year-over-year comparisons and because their growth rates have been diverging more among each other. Nevertheless, the collective Magnificent 7 earnings growth rate still exceeds the rest of the S&P 500, and this trend is forecast to continue until Q1 2026.

Earnings growth rates expected to converge next year

S&P 500 year-over-year earnings growth and consensus estimates (%)

• Magnificent 7 stocks*
• S&P 500 excluding Magnificent 7

*Magnificent 7 stocks are Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

Source – RBC Wealth Management, Bloomberg Intelligence; data as of 8/7/25; Q1 2023–Q1 2025 are actual results, Q2 2025 onward are Bloomberg consensus estimates (E)

Importantly, the point of earnings convergence – when Magnificent 7 and non-Magnificent 7 growth rates are forecast to come together – has been pushed out again.

In April 2024, the consensus forecast was for convergence between these two groups to occur in late 2024/early 2025. But that didn’t pan out, and by February 2025, the convergence moment had been pushed out to Q3 2025. Now it’s been pushed out to Q1 2026, according to the latest consensus forecasts.

Earnings convergence between the Information Technology sector and non-Tech S&P 500 stocks isn’t expected until Q4 2026, according to Bloomberg consensus forecasts.

A big gap in Tech stats argues for restraint

Bloomberg Intelligence analysts recently pointed out a notable development within the Information Technology sector.

Since late 2022, the Tech sector’s market capitalisation (market value) as a proportion of the S&P 500’s total market cap has expanded meaningfully, from around 22 percent to over 32 percent.

Yet at the same time, the Tech sector’s net income (net earnings or net profits) as a proportion of the S&P 500’s total net income hasn’t moved up much. It’s risen from 21 percent in late 2022 to 23 percent recently.

The chart illustrates that the gap between these Tech market cap and net income measures has widened substantially.

The gap between the Tech sector’s share of market cap and net income has widened significantly

Information Technology sector as a share of the S&P 500 (%)

• Tech sector market cap as share of S&P 500
• Tech sector net income as share of S&P 500 (TTM)

Source – Bloomberg Intelligence; quarterly data through 6/30/25; “TTM” means trailing 12-months earnings

To bring this relationship back to a more reasonable balance, Bloomberg Intelligence estimates that Tech sector earnings would need to grow substantially more than the already-elevated growth rates. Its analysts doubt this will pan out, especially given the difficult comparisons recently, and we agree with this assessment.

To us, this is a signal that a lot of good news has already been priced into the Tech sector. While we still view the Tech sector’s mid- and long-term prospects favourably, at this stage, we would refrain from being excessively Overweight the sector or adding new funds to it for the time being.

*This commentary uses earnings statistics from Bloomberg Intelligence. Data from other earnings aggregator firms such as FactSet can differ mainly due to the different treatment of one-time items for the current and previous quarters, and this can impact future consensus growth rates. Nevertheless, in general, the broad earnings trends are usually similar between the major aggregator firms.

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