US earnings: above average earnings beats and the AI arms race

Supportive fundamentals have contrasted with Wall Street’s artificial intelligence (AI) angst after the S&P 500 results season neared its conclusion with quarterly earnings growth of 12% on a year earlier.

More than 350 companies had posted their figures by the end of last week, with about two-thirds beating expectations for earnings per share (EPS).

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The biggest test is still to come when NVIDIA Corp (NASDAQ:NVDA) posts results on the evening of Wednesday 25 February, while Walmart Inc (NASDAQ:WMT) is due to provide an insight into the mood of the US consumer when it reports earnings before tomorrow’s US opening bell.

The S&P 500 index rose 16.4% in 2025 but has lagged other benchmarks including the FTSE 100 index and FTSE 250 index following a flat performance so far in 2026.

The forward 12-month price/earnings ratio has drifted from 22 times to a still lofty 21.5 times, which FactSet notes is above the five-year average of 20 times and the 10-year of 18.8 times.

The market rotation out of AI-exposed stocks has come despite a generally strong results performance by Info Tech stocks and the Magnificent Seven after they grew earnings 26% year-on-year in the fourth quarter versus the rest of index at 6% higher.

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Consensus forecasts suggest this cohort will grow 25% year-on-year versus the rest at 8%, although the gap is less extreme for the median stock and is expected to further narrow.

Bank of America said this week that the latest results suggested the AI arms race is alive and well, despite the market’s increased scrutiny on spending.

It pointed out that Amazon.com Inc (NASDAQ:AMZN), Google owner Alphabet Inc Class A (NASDAQ:GOOGL) and Meta Platforms Inc Class A (NASDAQ:META) all issued blowout capital expenditure in the quarter, some 35% ahead of Wall Street estimates in aggregate.

When factoring in Microsoft Corp (NASDAQ:MSFT) and Oracle Corp (NYSE:ORCL), it said capex growth is forecast to decelerate from 72% year-on-year to 63% in 2026 whereas the rest of the index is expected to flatline at 8%.

It pointed out that hyperscalers’ 2025 capex estimates were revised up by a significant 30% since reporting 2024 results this time last year, suggesting potential upside ahead.

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The bank said that S&P 500 earnings currently show 12% growth year-on-year, which if achieved is near to the previous quarter’s 13% and five percentage points better than expectations at the start of January.

The level of earnings beats has been above the historical average of 60% but below the previous quarter’s 75%, which was the best beat rate since 2021.

The solid quarter has left consensus expectations for 2026 largely unchanged at 14% higher.

BofA estimates that foreign exchange boosted sales growth by 1.2 percentage points in the fourth quarter and that it is set to improve to 1.9 percentage points in the current quarter, which would be the largest lift since 2021.

It added: “Historically, revenue and EPS beat rates have been higher amid dollar weakness.”

The bank said that reactions to beats and misses have been smaller than usual this quarter, with companies that exceed both the top and bottom line outperforming the S&P 500 by an average of 110 basis points the next day, slightly below the historical average.