Earnings bulls say the AI stock rally still has fuel

More than 50 S&P 500 companies had reported second-quarter numbers by July 17, and Nick Raich of the Earnings Scout says the early scorecard is loud: 96% topped estimates, with overall earnings growth of 32.4%.

That matters because stocks have already had a strong run. The S&P 500 has climbed close to 20% over the past 12 months, according to MarketWatch columnist Michael Brush, while the index’s price-to-earnings ratio recently slipped to 22.1 from 23.7 a year earlier. The reason, Brush reported, is that earnings have risen faster than share prices.

Raich expects total earnings growth of 20% for the quarter, far above the typical gain of about 6%. He told Brush that the early reports give him a good read on what the wider batch of results will show.

Why the bulls are still buying

Raich’s case is built on earnings revisions, not only headline profits. He told Brush that stronger estimates are spreading beyond technology and consumer companies, with banks showing better momentum last week.

Sales growth is also doing work. According to Raich, revenue is running at about 19% year over year, more than three times the long-term trend. He said that strength suggests the profit gains are not only coming from cost cuts, buybacks or accounting moves.

Another marker is the third quarter, which ends Sept. 30. Raich said earnings estimates for that quarter were recently up 3.7%, even though forward-quarter forecasts usually get reduced while companies report the prior period. He called that a bullish sign.

Raich also pushed back on comparisons between today’s tech-led market and the dot-com peak. He told Brush that in 1999, earnings-estimate upgrades had been losing steam for months while stocks kept rising. Today, he said, share prices and earnings-estimate momentum are still moving higher together.

Tech and chips remain the main event

Larry McDonald of the Bear Traps Report has a very different take on semiconductor stocks. He told Brush that hyperscalers such as Meta Platforms and Microsoft may lower capital-spending forecasts when they report earnings, partly because of concerns about returns on AI investments. McDonald said that would help Meta but hurt chip stocks, and added that data-center growth could slow because of local opposition.

Raich disagrees. He said estimate trends for chip names including AMD, Intel and Marvell are still improving. He also pointed to recent second-quarter results from ASML Holding and last month’s Nvidia report as support for the chip trade.

Raich remains positive on technology overall, including Microsoft, and said the sector has some of the market’s strongest earnings-revision momentum. His message to investors, as quoted by Brush, was to stay long stocks, keep an overweight position in technology and remain in the AI trade.

Insiders and Micron add more sparks

Brush also reported notable insider buying in several tech-related names. Fiserv insiders recently bought $1.7 million of stock at prices up to $50.60. An Adobe director bought $1.9 million at $194.51, after earlier insider selling around $245. Autodesk insiders, including the CEO, bought $2.1 million at prices between $189 and $231. Broadcom’s board chair bought $370,000 at $373.56.

Micron Technology remains more complicated. Brush reported that the DRAM maker’s shares are up more than 650% in the past year, while its price-to-sales ratio of 11.3 is more than double its five-year trailing average of 4.9, according to LSEG.

Raich said Micron’s earnings-revision momentum has slowed, making him more cautious. Still, he told Brush the stock could continue rising if it follows a pattern similar to Nvidia, whose revision momentum cooled for six quarters before its share price fell.

Brush disclosed that, at publication, he owned Meta, Microsoft, AMD, Marvell, ASML, Nvidia and Micron, and had recommended several of the stocks in his newsletter.

This story draws on original reporting from MarketWatch.