Episode summary
Are Corporate Earnings in a Bubble? This Quarter Is a Test | WSJ’s Take On the Week
The Journal
· · Hosts: Telis Demos, Miriam Gottfried · Guests: Christine Short
Summary
Corporate earnings are the focus because analysts have pushed S&P 500 second-quarter EPS growth estimates up 3.4%, the biggest upward revision since Q1 2021. Christine Short said that is unusually exuberant, with consensus now at 23.3% EPS growth and 12.2% revenue growth, even though this is not a classic post-crisis rebound. The hosts argued that AI-related spending, tighter supply chains, cost cuts, and accounting choices are all helping profits look stronger than underlying demand.
They highlighted semiconductors, especially TSMC and the broader chip trade, as a major test of whether the AI buildout can keep driving profitability. They also pointed to healthcare as the lone weak spot, with negative second-quarter earnings growth expected for the sector, partly because of company-specific charges such as Gilead’s M&A-related adjustments.
Short said investors are now in a “show me the money” phase: they want proof that heavy AI capex is producing returns in cloud revenue, software subscriptions, or operating efficiency. She also said the Late Earnings Report Index remains low, implying limited uncertainty, but that CEO confidence has softened and the market may be nearing the peak of this earnings cycle.
Key takeaways
- Christine Short said analysts have raised Q2 S&P 500 EPS estimates by 3.4%, the largest increase since Q1 2021.
- Short said consensus expects 23.3% S&P 500 EPS growth and 12.2% revenue growth, with 10 of 11 sectors projected to grow except healthcare.
- The hosts said AI spending is boosting semiconductors and banks, but investors are demanding proof that the returns are real.
- Short said accounting and depreciation choices around AI assets may be making earnings look better than the underlying cash economics.
- The LERI reading is still low, which Short said suggests CEOs have short-term clarity, even as confidence has softened.
Notable quotes
“how much analysts have ratcheted up those estimates by 3.4%. As anyone that follows earnings knows, that's that's pretty rare”
“This is the most analysts have ratcheted up since Q1 2021. So 5 years”
“facts that right now their consens consensus estimate for S&P 500 EPS uh growth is 23.3%. That's a that's a lot”
“investors are in their show me the money stage”
How the episode opens
I think one of the most interesting data points uh going to this quarter is how much analysts have ratcheted up those estimates by 3.4%. As anyone that follows earnings knows, that's that's pretty rare. This is the most analysts have ratcheted up since Q1 2021. So 5 years.
Hi Miriam. — Hi Telus. — So we've got an episode about earnings. earnings are happening this quarter, which
Should not be news to people. They happen like clockwork four times a year, every quarter. So, on the one hand, you're like, why are these guys talking about earnings?
What what are we really going to learn? But I think this is actually a really really interesting quarter to look at this because earnings growth has been extraordinary outside of periods where we are recovering from something horrible happening. And so earnings growth is really high because we're coming out of a low base talking about COVID, talking about the 2008 financial crisis.
Earnings are growing at a level or expected to grow at a level that you associate with those periods, but we're not coming out of some immediate crisis. Uh so what's going on? Are companies really just becoming dramatically more profitable right before our eyes?
Um or are, and here's a term that people have started using, are we in an earnings bubble? We're used to talking about bubbles being like the prices are too high, maybe the earnings are too high. Uh, and we're going to bring back a guest that we've had before in this show and she was terrific.
Christine Short. She's the head of research at Wall Street Horizon, which is a TMX company. And we're going to talk through some of the the question marks around the corporate earnings trend that has really been a huge driver of the market.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- earnings bubble
- semiconductor earnings
- healthcare earnings slowdown
- ai-driven efficiency
- bank earnings preview
Companies and tickers mentioned
- TSM
- JNJ
- UNH
- ABT
- BJ
- FDX
- NKE
- JPM
- GS
- BAC
- Taiwan Semiconductor Manufacturing Company
- Johnson & Johnson
- UnitedHealth Group
- Abbott Laboratories
- TMX Group
- Wall Street Horizon
- BJ's Wholesale
- FedEx
- Nike
- JPMorgan Chase
- Goldman Sachs
- Bank of America
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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