The first quarter of 2026 saw earnings growth in the S&P500 grow by 28% over the same period in 2025. This was the fastest growth since Q4 2021 coming out of Covid lockdowns. Earnings estimates for Q2 2026 have increased since March 31, which is unusual in that estimates generally decline slightly. This upward variation last occurred in Q3 2021.

The Mag7 (META, GOOGL, MSFT, AMZN, AAPL, NVDA, TSLA) grew earnings by 63%. This beat estimates by 32%. This may be why analysts are increasing earnings estimates for Q2 given they are chasing actual results. The technology sector grew earnings by 53%. The other 493 companies grew earnings by 17% year over year in the first quarter. If these growth rates were to persist for two years, almost 90% of earnings will be from tech shares.

Excluding the tech sector, the remainder of the SP500 grew earnings by a strong 11%. Manufacturing just put up its 5^th consecutive month of expansion, after almost 3 years of contraction. Employment in manufacturing, and in general remains moribund. We are continuing in the ‘no hire, no fire’ environment.

SpaceX is expected to go public on June 12. To say there is excitement around its IPO is a dramatic understatement. Many of the rules for inclusion in the major indices have been changed to allow SpaceX, which lost $4 billion in 2025, to be included in the NASDAQ and SP500 much sooner than usual. In addition, only a small fraction of shares will be made available to the public. About 4% of total shares will be made available to the public. More than 90% of shares in NVDA, MSFT and AMZN are publicly held.

While more shares will become available over the next several months, this constriction in quantity is likely to cause extreme volatility in its price. Retail investors looking to buy on June 12 may find it very difficult to actually transact with any care towards price.

Anthropic announced today that it will file for its IPO this summer. It’s expected that OpenAI will do the same in short order.

Valuations for SpaceX are absurd. It lost money in 2025 so there are no earnings ratios. The Price to Sales though is expected to be around 100x. For context, the P/S ratio for TSLA is 16x. The Price to Sales ratio of the Mag7 is 7.2 and for the SP500 is 3.7x.  For the SP500, the average over the past 10 years is about 2.5x.

The extreme valuation, scant number of shares, excess ‘excitement,’ and upcoming IPOs should make this summer one to remember for the stock market.

In late-stage bull markets, investors don’t buy earnings, they buy dreams of perpetual growth. While valuations for tech shares are not at extremes, some are saying their earnings growth rate is unsustainable, calling it an ‘earnings bubble.’    Tech and tech-adjacent stocks currently make up 35% of earnings on the SP500. At current growth rates, this could be 80% of total market earnings in less than 2 years.

Are we at the dawn of the AI-age or are we witnessing an unsustainable growth in investment and expectations with the cherry-on-top being this cycle’s most ballyhooed IPOs, AI, and space exploration? Will bulled-up investors be able to sell, locking in gains or will we ride the market up and then back down as so often occurs? Only time will tell.

One might see a clue in METAs earnings call, wherein they suggested their pace of AI of investment may not be sustainable. After beating estimates on revenue and earnings soundly, META sold off by more than 10% -the next day! Stocks that have been promoting their vast sums being invested into AI generally have been rewarded. The major hyperscalers which recently have been able to rely on Free Cash Flow, are beginning to borrow to   sustain their AI investment and stock buyback programs.

Even with no job growth and 4% inflation, for stock investors, there is nothing that can shake their optimism.

Adam Waszkowsk, CFA
Director of Portfolio Management

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