Q2 Earnings Looked Almost Too Good. Here's the Number That Actually Matters.

A few clients asked me some version of the same question this quarter: "the market feels too good, what am I missing?" It's a fair instinct. When headline S&P 500 earnings growth comes in near 50% year over year, a skeptical reaction is healthy. The job is figuring out whether that number is real or whether it's an artifact of something temporary.

In this case, it was partly an artifact, and the real number underneath is still strong. A meaningful chunk of that headline growth came from one-time items: mark-to-market gains on mega-cap tech companies' private stakes in AI businesses, and tariff refunds following a legal ruling, with individual companies picking up hundreds of millions to over two billion dollars apiece from the refunds alone. Strip those one-offs out, and underlying earnings growth was still roughly 31% year over year. That's a strong number on its own, without needing an accounting tailwind to get there.

The More Telling Number Was Revenue, Not Earnings

Earnings can be managed, timed, and inflated by items like the ones above. Revenue is harder to dress up. Median company revenue grew around 15% year over year, the strongest pace in years, and profit margins pushed toward an all-time high. Ten of eleven S&P sectors grew earnings, healthcare being the lone exception. That breadth, real revenue growth across most of the market rather than a narrow handful of names, is a better signal of underlying health than a headline earnings number that happened to get a one-time boost.

The behavioral lesson here is the one I come back to with clients more than any specific data point. The instinct to be suspicious of a number that looks too good is the right instinct, and the discipline is in actually checking it rather than either dismissing the market's strength out of hand or getting swept up in the headline. Average investors have underperformed the market itself by a wide margin over long periods, and the gap is almost entirely behavioral, not a difference in what they owned. Reacting to a headline instead of what's actually underneath it is exactly the kind of decision that creates that gap.