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Strong corporate revenues boost market confidence
AI-led companies are leading market profits
Short-term volatility is expected, but the long-term outlook is positive
NEW YORK, July 31 (Reuters) – With more than half of second quarter revenue reported and stocks approaching record highs, the company's results have reassured investors about the artificial intelligence trade that has energized Wall Street, even if tax concerns thwart purchases.
LSEG data shows that as of Thursday, 297 S&P 500 companies were estimated at 9.8% year-on-year revenue growth in the second quarter, up from the estimated growth of 5.8% on July 1.
Next week, investors will peer into the revenues from Dow Jones' constitutional industrial average Constitutionalists Disney, McDonald's and Caterpillar to see the broader economy. These companies' strong profit reports can rely on fresh peaks, pushing the Dow and shy and shy of the record highs in December.
Approximately 81% of companies have beaten analysts' expectations for revenues above the average of 76% over the past four quarters.
“The revenue season is clearly better than expected,” said Art Hogan, chief market strategist at B. Riley Wells in Boston.
The strength of the company's revenues is particularly comforting for investors after the clashing sentiment was gained in the last quarter due to the twin threat of tariffs and concerns over flagging economic growth.
“The first quarter was a little more mixed and there was some suspicious economic data… I think it gave the market some pause,” said Tim Grisky, senior portfolio strategist at Ingalls & Snyder in New York.
“But it appears the second quarter was just a turnaround,” Grisky said.
The strength of the outcome of names linked to the AI trade — an investment paper that says that AI is the transformational force driving a significant portion of future economic growth and corporate profits — is particularly encouraging, investors and analysts said.
“Overall, it was megacap, growth/technology/AI that was driving a lot of the outcome,” says Ghriskey.
“This is where we want to be public from a corporate perspective… We are on our biggest stock exposure and we are comfortable there.” Trade came into rough waters earlier this year as the emergence of Chinese-established artificial intelligence startups rattle investors and robbed concerns that could disrupt the dominance of established tech giants at the heart of AI trade, including NVIDIA. The powerful results of Microsoft and Meta platforms have reassured investors that large-scale bets on AI are paying off.
Concerns about AI demand appear to be exaggerated, said Viresh Kanabar, research analyst at Macrohive.
Trade-related Tumult earlier this year encouraged many investors to paint their stock exposure, particularly risky growth stocks.
Even after market rebounds, the S&P 500 is up around 6% per year, nearing a record high – institutional investors are slow to return to stocks. Overall, investors' equity positioning is still slightly overweight, according to Deutsche Bank's estimates.
The strength of revenue from AI and technology names will attract more investors and boost the market in the coming weeks, analysts said.
“If you were trying to beat your benchmarks and you were either underweight of the AI names you have to chase after them,” said Hogan of B. Riley Wells.
After a 2.2% increase in the S&P 500 in July, a seasonally unstable month in August and September, the market could face short-term turbulence, Hogan said. Historically, August marked a recovery in the stock market, peaking in October. Stocks were sold sharply on Friday in August, with dozens of trading partners and impressive revenues from Amazon focusing on sentiment, while weaker pay reports added to risk aversion.
But Hogan said that pullbacks on the market should be seen as an opportunity to buy, especially in some megacaps.
With Big Ai names from Alphabet, Alphabet, Microsoft, Nvidia, Meta Platforms and Amazon, he commands about a quarter of weight on the S&P 500, AI trade health is market-friendly at the index level.
“We're not saying there's no weakness in other parts of the economy,” Canabal said.
“We say at the index level, the largest companies dominate to that extent (that's not important at this point.” (Reporting by Saqib Iqbal Ahmed, Additional Report by Caroline Valetkevitch and Chuck Mikolajczak, Editing by Alden Bentley)
