Earnings cycles

Corporate earnings are on a historic run, both on top and bottom lines, but at what point does “good” become “too good”? Take a look at the top chart below: S&P 500 quarterly EPS is now further above its long-term trend channel than at any point since 1955. Not since the mid-’50s has profitability run this hot relative to its historical baseline, not during the dot-com boom, not during the mid-2000s credit expansion, not during the post-COVID recovery. At the same time, the breadth of earnings beats is near a record high. The share of S&P 500 companies beating estimates isn’t just elevated, it’s beating the 2006-2019 average of 74% by a wide margin, and doing so broadly across the index rather than being carried by a handful of mega-caps. On the surface, this is unambiguously bullish. Strong earnings, broad-based beats, resilient margins. Exactly what you want to see.But it raises a harder question: how much of this is durable operating strength, and how much is a temporary confluence of factors, such as pricing power in a still-sticky inflation environment, AI-driven productivity gains that haven’t fully normalized or cost discipline built during the 2022-2023 tightening cycle? History doesn’t offer much comfort here. Every prior instance of EPS running this far above trend eventually mean-reverted; sometimes gently, sometimes violently. That’s not a prediction of an imminent correction. It’s a reminder that trend channels exist because economies and corporate profitability are cyclical, and extremes tend to resolve rather than persist indefinitely. The valuation question follows naturally: markets are pricing in a lot of this strength continuing. If earnings normalize back toward trend even modestly, the multiple investors are currently willing to pay looks very different. Strong fundamentals today don’t guarantee strong fundamentals tomorrow. Worth keeping in mind as we head into the next earnings season.

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