The high valuation of U.S. stocks is gaining more robust fundamental support: corporate profits are not only growing but analysts are also continuously raising future expectations.

A U.S. stock earnings revision report consolidating data from multiple institutions shows that S&P 500 earnings per share (EPS) are now about 14% above the trend channel formed based on over 90 years of historical data, marking the first deviation of this magnitude since 1955. The report also points out that the proportion of companies exceeding earnings expectations, the magnitude of sales beats, and analyst earnings upgrades are all at historically strong levels.

This data explains why U.S. stocks can still find support despite high valuations. Over the past year, AI investment, interest rate expectations, and liquidity have collectively driven up risk assets; as the index climbs further, relying solely on narratives is no longer sufficient. Corporate profits must continue to grow to digest the higher valuations.

However, strong earnings also present another side: when profit levels are significantly above the long-term trend, market expectations will rise in tandem. Merely meeting forecasts may no longer be enough to drive stock prices higher; once revenue, profit margins, or future guidance fall short of expectations, the pressure on high valuations could also intensify.

S&P 500 quarterly EPS rises above its long-term trend channel. The report states it is 14% above the 90+ year trend channel, the first time since 1955.

How Strong Are the Profits: S&P 500 EPS Reaches a Rare Position in 70 Years

The report's assessment of the current earnings strength comes mainly from three levels.

First, the absolute level of S&P 500 EPS continues to rise and has clearly broken through the long-term trend range. According to Deutsche Bank's calculations cited in the report, strong earnings growth over consecutive quarters has pushed S&P 500 EPS 14% above its long-term trend channel.

Second, actual corporate performance is generally better than analyst forecasts. The report states that the coverage of S&P 500 companies exceeding earnings expectations is near historical highs, and the overall magnitude of sales beats has risen to a nearly five-year high.

Third, earnings expectations have not been revised downward as usual after the start of the earnings season; instead, they continue to rise. The report shows that in July, analysts raised their bottom-up quarterly EPS expectations for the S&P 500 by 0.3%. Historically, analysts typically lower forecasts in the first month of a quarter to reflect more cautious management guidance and macroeconomic assumptions.

These signals collectively indicate that the current U.S. stock market is not facing a rally driven solely by valuation expansion. Corporate profits themselves are providing support, and actual performance is still consistently surpassing prior expectations.

However, "strong earnings" does not mean all data can be directly mixed.

One striking figure from the report is that S&P 500 Q2 earnings grew by 33.2%, a level not seen in over 30 years, second only to the special recovery phases following the financial crisis and the pandemic.

It is noteworthy that in the public data cited in this article, FactSet, as of July 2, estimated S&P 500 Q2 earnings growth at 23.3% year-over-year; Axios cited FactSet's figure as 22.5%, and Bloomberg's was around 25%. Therefore, a more accurate statement is: under publicly available metrics, S&P 500 Q2 earnings growth is roughly in the 23% to 25% range; the 33.2% figure in the report may use different statistical timing, sample scope, or adjustment methods.

Nevertheless, even using the 23% to 25% range, S&P 500 Q2 earnings growth remains at a high level, with the profit side still providing fundamental support for the index.

Where the Strength Lies: Earnings Beat Expectations, and Profit Forecasts Are Also Being Revised Upward

The value of this round of earnings improvement lies not only in the high Q2 numbers but also in the simultaneous rise of actual performance and future expectations.

Typically, as companies enter the earnings season, analysts gradually lower forecasts based on company guidance, cost changes, and macroeconomic risks. However, the opposite has occurred this earnings season: actual profits have consistently exceeded expectations, and analysts have subsequently continued to raise future EPS estimates.

The report, citing Carson's data, states that at the beginning of the year, the market expected the S&P 500 to achieve about 13% earnings growth in 2026; this expectation has now risen to nearly 28%. This number should be clearly labeled as the institution's metric cited by the report, not as a unified market consensus.

The more important change is that U.S. stock bulls are no longer relying solely on expectations of rate cuts, liquidity, or the AI narrative; they are also beginning to gain support from earnings upgrades.

As long as corporate profits continue to exceed forecasts and analysts keep raising future earnings expectations, high valuations may gradually be digested through profit growth. Conversely, once earnings revisions stop rising, the market will lose a key support, and valuation concerns will re-emerge.

The proportion of S&P 500 companies exceeding earnings expectations has risen to near historical highs, and the overall magnitude of sales beats has also reached a five-year high.

Has It Spread: Tech Stocks Remain the Main Driver, But More Companies Are Joining In

Whether strong earnings can persist also depends on whether growth spreads from a few large tech companies to a broader market.

Breakdown data from FactSet as of July 20 shows the S&P 500's overall blended Q2 earnings growth rate was 24.7%, while the earnings growth rate for the 493 companies outside the "Magnificent Seven" was 22.8%. This implies that the index's earnings growth is not entirely driven by a handful of mega-cap tech companies.

However, the pulling power of heavyweight stocks still cannot be ignored. If Micron and Nvidia are further excluded, the S&P 500's Q2 earnings growth would drop to 16.8%. The report also notes that after excluding star companies and their one-time gains, the median company in the S&P 500 had an earnings growth rate of about 13.8%.

These figures point towards a more balanced judgment: earnings growth has spread, but large tech and semiconductor companies remain important engines.

Data at the industry level also requires cautious interpretation.

The Deutsche Bank metric cited states that all S&P 500 sectors are on track for a second consecutive quarter of positive growth, with 8 out of 11 sectors likely achieving double-digit growth. Meanwhile, the publicly available FactSet metric from July 2 indicates that 10 out of 11 sectors are expected to see year-over-year earnings growth, with Healthcare being the only one expected to decline; on the revenue side, all 11 sectors are expected to achieve year-over-year growth.

Thus, it can be seen that earnings improvement has covered most sectors, but differentiation between sectors still exists.

It is worth noting that revenue growth indicates that overall corporate sales are still expanding, but final profits are also affected by wages, raw materials, depreciation, product mix, pricing power, and one-time gains/losses. The same revenue growth rate can translate into vastly different profit outcomes across sectors.

The true value of earnings diffusion lies in the S&P 500's profit base broadening; the index is no longer completely dependent on a few tech giants. However, this is not sufficient proof that all companies and sectors have entered a synchronized growth cycle.

Under the report's metric, earnings growth has accelerated for most S&P 500 sectors, and contributions to index earnings growth are expanding beyond tech and large-cap growth stocks.

Why Stronger Profits Lead to a Higher Earnings Bar

Strong earnings can support valuations but also create higher comparison benchmarks.

According to the report's calculations, S&P 500 EPS is already 14% above its 90+ year trend channel. This does not mean corporate profits are about to peak, nor can it directly lead to the conclusion that the market is about to correct; it indicates that the current profit level is significantly above the long-term trend, meaning future year-over-year growth will face greater pressure from a high base.

When earnings expectations are revised up from about 13% at the start of the year to nearly 28%, the market has essentially priced in fairly optimistic growth assumptions in advance. The test companies face thereafter is no longer just "whether there is growth," but whether the growth rate can continue to exceed constantly rising forecasts.

The report shows that full-year earnings growth expectations for the S&P 500 have risen from about 13% at the start of the year to nearly 28%.

This also means a seemingly contradictory situation could emerge during the earnings season: overall profits remain strong, but individual stocks may not necessarily rise due to earnings growth.

The reason is that stock prices reflect the gap between actual results and market expectations. If the market already expects a company's revenue to grow 20%, actual growth of 20% can only be considered in line with expectations; if profit margins, orders, or future guidance are slightly below the market's prior assumptions, the stock price may still fall.

High profitability also increases valuation sensitivity to bad news. A slowdown in sales growth, profit margins under pressure from costs, AI capital expenditure returns falling short of expectations, or management issuing conservative next-quarter guidance could all trigger more pronounced valuation adjustments.

Therefore, stronger profits do not imply lower market risk. They imply more solid fundamental support, but also imply higher investor demands.

In July, analysts raised their quarterly EPS expectations for the S&P 500 by 0.3%; historically, analysts typically lower earnings expectations in the first month of a quarter.

What to Watch Next: Whether Revenue, Margins, and Earnings Revisions Can Sustain

Going forward, judging whether U.S. stock profits can continue to support the index requires focusing on four more specific variables.

First is revenue growth. Profits can improve in the short term through cost control, buybacks, or one-time gains, but revenue better reflects whether demand is genuinely expanding. If sales growth begins to slow noticeably, the sustainability of profit expansion will also be questioned.

Second is profit margins. The current earnings growth partly stems from the high profit margins and scale effects of large tech companies. If wages, energy, depreciation, or financing costs rise, revenue growth may not translate proportionally into profits.

Third is the return on AI-related capital expenditures. Large tech companies are still investing huge sums in building data centers, purchasing chips, and expanding cloud infrastructure. Investors need to see these expenditures gradually translate into cloud revenue, software subscriptions, advertising efficiency, or enterprise AI service revenue.

Fourth is the direction of earnings revisions. Whether analysts continue to raise 2026 and 2027 EPS forecasts may be more important than a single quarter's earnings growth rate. As long as expectations continue to be revised upward, high valuations can still find support; if earnings revisions peak or even turn downward, the market's tolerance for high valuations will also quickly diminish.

In summary, the most positive signal from this round of U.S. stock earnings is the simultaneous improvement in short-term performance, breadth of growth, and future expectations. The index rally is not solely reliant on liquidity and the AI theme; corporate profits themselves are also providing support.

But this support is already built on exceptionally high profit levels and market expectations.

The stronger the profits, the more reason valuations have to be maintained; the higher the expectations, the greater the cost of earnings missteps. What will truly determine whether U.S. stocks can continue to rise from now on is not whether companies can deliver a "good" earnings report, but whether revenue, profit margins, and future guidance can continue to exceed the increasingly high bar set by the market.