Earnings Season Is Going Really Well. Don’t Overthink It.

Apple was just one of Big Tech’s earnings success stories. (Michael M. Santiago/Getty Images)

For all the stock market has been facing, earnings have been strong. And investors have applauded.

Admittedly, the market turned jittery on Friday. The S&P 500 took a tumble, pulled down in no small part by Amazon.com’s 7.7% drop. The company offered up disappointing profit guidance.

But overall, strong financial results, have kept the S&P 500 up almost 7% this year—near record highs—and up almost 1% for July, the start of earnings season.

Out of the 317 S&P 500 companies that reported as of Friday morning, 83% have beaten analysts’ profit forecasts, according to Evercore. Sales results, in aggregate, have beaten estimates by 2.6%, and earnings have come in 8.3% higher versus expectations.

Profits beating revenue by such a large percentage indicates that profit margins are coming higher than expected. That’s evidence that cost increases such as employee pay and marketing aren’t keeping pace with top-line growth.

That’s music to the market’s ears. Companies beating on both the top and bottom lines are seeing an average stock price gain of 1.4% on the trading day after they report. It’s also true that companies that miss with earnings, or even deliver disappointing guidance, have seen their shares drop more than usual —not a surprise given the market’s rally.

But the takeaway is that market has shown consistently that it will the reward the companies that beat.

Meta Platforms, for example, beat earnings estimates by 21% on Wednesday. Sales were 6% above estimates because its artificial intelligence enables it to charge advertisers more and keep users on the platforms for longer. Couple that with operating expenses that didn’t rise much more than projected, and the earnings report was a blowout.

Plus, management’s outlook for $49 billion of sales—the midpoint of its third-quarter range—implies 21% year-over-year growth. The market cheered because the outlook shows Meta can sustain above 20% growth.

Meta’s forecast spurred an 11% stock gain on Thursday. Even though shares had been on a tear—up 51% in the past year—they couldn’t go anywhere but up because earnings were so far above what the market had imagined.

Microsoft told a similar story on Wednesday. Sales beat estimates by just over 3% and earnings per-share came in 5.3% higher, driven in part by an operating margin that surpassed estimates. The stock gained 3.9% on Thursday, even though it has climbed 25% in the past year.

In a word, Microsoft’s cloud business is booming. Azure, the company’s cloud-computing platform, grew 34% year over year—a few percentage points more than 2024. AI is making its software even more attractive.

On Thursday, Apple beat sales and earnings estimates and gave better-than-expected third-quarter sales guidance, which included more growth in the age of AI. The stock was up almost 2% on Friday, though it dipped into the red as Friday’s broader market drop gathered momentum.

Big Tech’s earnings lifted other stocks. The market is now more confident that companies across the board will keep investing heavily in AI, which means goods and services from the AI providers—Big Tech—will keep growing quickly.

Software stocks, broadly speaking, are up this year. Oracle, for example, is up 48% this year. Several manufacturers that see higher sales when Microsoft spends more on data centers also saw their stocks pop on Thursday.

Of course, not everything is rosy. Tariffs cloud the economic picture. No one can say with any certainty what’s going to happen to prices and jobs in the long run.

But companies are delivering solid numbers, supporting stocks. There’s plenty of reason to believe corporate America can keep upping the earnings ante.

Earnings are crushing expectations. Right now, companies are dancing to the beat.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com