Blockbuster earnings from the S&P 500, and a likely truce in the gulf have propelled the markets to record highs. It seems like a little profit-taking might be in order.
On Wednesday morning, May 6th, the US government indicated that a one-page MOU was likely to be signed between Iran and the U.S., effectively reopening the Straits of Hormuz and paving the way for the removal of sanctions and a path to a wider agreement over time.
Over the weekend gas prices had passed $4.50 per gallon at the pump, and clearly the administration did not want to see this escalate as summer started. I believe the chances of a truce look very imminent, as did investors, who adopted a strong risk-on stance, and piled on to the market, which led to the S&P 500 notching another record high to 7,365.08, and the Nasdaq Composite jumping 2% also to a record high of 25,838.94. The VIX dropped as well to 17.21 and the 10-year treasury stayed steady 4.35
Excellent results from AMD and other data center infrastructure stocks helped as well, and for a change even cybersecurity, got love with Fortinet reporting excellent results
SaaS stocks also got a little sassy, helped by positive reactions to DoorDash and Atlassian.
This is where we stand – 10% above the 200DMA, and 5.4% above the previous high.
It is hard to not partake in a rampaging bull market and for the most part, my focus has been on finding the right companies to maximize returns, mostly ignoring the noise from macro economic factors and geo-political events. So far, with timely purchase between mid-March and mid-April, keeping clear of the noise from the gulf helped achieve excellent results.
Still, valuations are now stretched, and I’ve achieved far more than my planned targets. This relentless melt up in stock prices, which started with systematic trades, followed by extreme FOMO feels like one of the more powerful bull markets in this century, and now it's getting worrisome because there are too many negative economic factors getting ignored. It makes me think of Mad Magazine’s Alfred E Neuman's slogan “What Me Worry?
The chances of a pullback will increase as we get past earnings season. I suspect the blow off top for this bull run comes with the conclusion of the war in Iran – I would even think that we may have seen it with the 2% rise in the Nasdaq Composite index on Wednesday. It does seem clear that the Trump administration wants to end this as soon as possible with gas prices soaring and poll numbers showing that the conflict is extremely unpopular. Therefore, I would prefer to take some profits (sell the news) when the MOU is finally signed, but am hesitating because of superb earnings, which is the most important bullish factor right now.
We’ve had a blockbuster earnings season so far with more than 75% reporting, and that’s pretty much kept out the news of the Iran war, high inflation, high interest rates, weak job creation and negative consumer sentiment out of the market. The American economy is the AI economy and the stock market, and Q1-2026 earnings have delivered.
Of these companies, 84% have reported actual EPS above estimates, which is above the 5-year average of 78% and above the 10-year average of 76%. If 84% is the actual number for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise since Q2 2021 (87%). In aggregate, companies are reporting earnings that are 20.7% above estimates, which is also above the 5-year average of 7.3% and above the 10-year average of 7.1%. If 20.7% is the actual number for the quarter, it will mark the highest surprise percentage reported by the index since Q1 2021 (22.2%). Historical averages reflect actual results from all 500 companies, not the actual results from the percentage of companies that have reported through this point in time.
And from FactSet’s analysis the second is likely to share a repeat performance of excellent earnings.
During the month of April, analysts increased EPS estimates for S&P 500 companies for the second quarter. The Q2 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q2 for all the companies in the index) increased by 2.1% (to $80.47 from $78.84) from March 31 to April 30. In a typical quarter, analysts usually reduce earnings estimates during the first month of a quarter. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 0.9%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.4%. During the past fifteen years, (60 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has also been 1.7%. During the past 20 years (80 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.9%. The second quarter marks the largest increase in the bottom-EPS estimate during the first month of a quarter since Q2 2021 (+3.5%).
Analyst’s consensus bottoms up EPS has jumped to $331 per share for 2026, and $378 for 2027. Six weeks back, these numbers stood at $311, and $360!
