This Earnings Season Could Bring More Of The S&P 500 To Life

Strong profits, lower energy prices, and calmer inflation could help market gains spread beyond the usual “tech” giants.

• Earnings are still a key driver of stocks. S&P 500 profits are expected to have grown by more than 20% last quarter, with similarly strong growth predicted for the rest of the year.
• Tech, energy, and materials are leading the index, sure. But ten of its eleven sectors are expected to post profit growth in this next reporting period – which hints at just how sturdy the current rally is.
• As energy prices fall, inflation should ease too, and that could take some of the heat out of interest-rate expectations. And if that’s the case, the market’s recovery could broaden out, giving non-tech stocks a moment in the sun.

Earnings are a key engine for stocks – a big, noisy, important one.

Plot the S&P 500’s returns against its earnings estimates over the past decade, and you’ll see the two lines basically move hand in hand. Makes sense, then, that investors pay close attention every earnings season. And with companies set to crack open their books in the coming weeks, it’ll soon be time to pull up a chair.

The S&P 500’s 12-month forward earnings per share (EPS) and the total return index from 2015 to 2026. Source: Morgan Stanley.

What are earnings likely to look like this time around?

S&P 500 companies are expected to post earnings growth of 23.3% in the last quarter, compared to the same period last year. That’s a big, optimistic upgrade from the 18.8% analysts were expecting just three months ago.

If that 23.3% estimate is accurate, it’ll mark the second quarter in a row with earnings growth above 20%, and the seventh straight quarter of double-digit earnings growth. For all of 2026, analysts expect earnings to grow 24.1% from the previous year, with expansion above 20% currently predicted in both the third and fourth quarters, too.

That strong profit backdrop is one reason why many strategists are so upbeat about US stocks. Morgan Stanley, for example, has a 12-month target of 8,300 for the S&P 500, compared to the current level of 7,530.

The energy, information technology, and materials sectors are leading the earnings growth this quarter, which helps explain why those sectors have also been the best performers so far this year. Funny how stocks tend to thrive when profits are doing the heavy lifting.

US sectors’ ETF performance so far this year and for the past three months. Source: Koyfin.

That said, there’s a lot more to the index than those three sectors. And this year, earnings growth is likely to be broad-based, with ten of the eleven US sectors expected to deliver good growth. And, if you’re wondering: healthcare is the one exception.

The price ratio of an S&P 500 equal-weight ETF versus a market-weighted one. Source: Koyfin.

The market-weighted approach has worked especially well since 2022, thanks to the AI boom. Hundreds of billions of dollars have poured into AI data-center infrastructure, giving chip companies a really peppy lift.

But that trend’s shown signs of reversing over the past year. From October 2025 to February 2026, the equal-weight ETF outperformed the market-weighted one.

And that might’ve continued if not for the start of the war in Iran: the rise in oil prices dashed everyone’s hopes for further interest-rate cuts and stoked the possibility of hikes instead. From March to May, the market-weighted index outperformed again as investors shuffled back into the AI trade.

Morgan Stanley now thinks the trend could shift again. With falling energy prices, easing tariff-related price impacts, and more contained services and housing inflation, it sees the Federal Reserve keeping interest rates steady for the rest of the year. And if that’s the case, that could lure investors out of the well-owned tech sector as the rally broadens out to other sectors.

And that makes sense: the equal-weight index has been performing better since a US-Iran ceasefire was announced, and Morgan Stanley sees that strength continuing. The bank also points out that volatility in semiconductor stocks has jumped sharply. That makes historically high exposure to the industry harder to stomach, because big price swings can test even the most hardened investors.

The key ingredient behind this potential pivot is broad earnings growth. Within the S&P 500, Morgan Stanley estimates that 62% of companies are growing sales by more than 5%, with the median sales growth reaching 7%. It also notes that the median stock in the S&P 1500 is now expanding earnings at a double-digit pace – the speediest since the post-pandemic boom.

What’s the opportunity?

Morgan Stanley likes consumer discretionary goods, industrials, and financials as overweight in a US portfolio – meaning it suggests holding more of those sectors than you’d find in a standard benchmark portfolio.

Morgan Stanley’s sector ratings. Source: Morgan Stanley.

The logic is pretty clean. If the Strait of Hormuz fully reopens, you can expect energy prices to fall, inflation to cool, and interest-rate expectations to ease. Whether that turns out to be right is another matter. Accurately predicting macro variables isn’t easy.

Still, that was the thinking behind the Research piece I published back on May 26th, Eight Beaten-Down Stocks That Should Rebound Fast When Hormuz Reopens. Those companies had been knocked down by a mix of higher oil prices, supply-chain upheaval, inflation, and higher interest rates. So if those factors reverse, they should be well placed to recover.

Interestingly, three of the eight companies (Carnival, Lennar, and Toyota Motor) were from consumer discretionaries – one of the sectors Morgan Stanley now favors. And one was from industrials, Southwest Airlines. The others on my list were Smurfit Westrock, Martin Marietta Materials, Reckitt Benckiser, and Korea Electric Power.

Their performance since May 26th has been pretty good, with Southwest Airlines up 20%, Smurfit Westrock up 16%, and Reckitt Benckiser up 9%. Of course, they’ve not all fared that well: Korea Electric Power, Toyota Motor, and Lennar are each down by around mid-single-digit percentages.

Performance of the eight stocks inside the Finimize Hormuz peace deal recovery basket. Sources: Koyfin.

But if buying individual stocks isn’t your bag, consider wading into the ETFs that track the three sectors that Morgan Stanley likes, or just opt for one of the S&P 500 Equal Weighted ETFs, for a simpler, potentially safer way to benefit from a broader market rotation.

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Originally Posted July 7, 2026 – This Earnings Season Could Bring More Of The S&P 500 To Life