US Stocks: Q1-March Earnings Review

■ As the market factored in the massive capital expenditures resulting from the expansion of AI demand, earnings growth expectations for related sectors have been significantly revised upwards.  
■ The S&P 500 hit a new record high due to upward revisions in EPS expectations. While valuations are not excessively high, there is still a risk of a significant correction. 
 
As of last weekend, approximately 94% of the S&P 500 constituent stocks, or 471 companies, had released their Q1-Q3 earnings reports. According to statistics from I/B/E/S, a subsidiary of financial information company LSEG, approximately 83% of these companies, or 395 companies, reported earnings per share (EPS) that exceeded market expectations. Overall EPS increased by 29.0% year-over-year (actual data was used for companies that released reports, and market forecasts were used for companies that did not release reports), far exceeding the market's expectation of a 14.4% year-over-year increase before the earnings release in early April. From an industry perspective, the Information Technology (IT) sector maintained high profit growth, with the forecast revised upwards from 46.3% to 55.2%; the Communications Services (CS) sector, previously expected to decline by 2.4% year-on-year, is now projected to grow by 50.9%; and the Consumer Discretionary (CDM) sector has been revised upwards from 1.9% to 40.4%. 
In terms of industry contribution, besides IT (12.9 percentage points) and CDM (6.2 percentage points), financials (4.5 percentage points) and CDM (3.0 percentage points) were also major drivers, further confirming strong demand for Artificial Intelligence (AI). 

 
Large cloud computing companies (hyperscale cloud service providers, such as Hyperscaler) announced massive capital expenditure plans, and the market expects rapid expansion in demand for AI semiconductors, memory, and storage devices, as well as data center construction, chips, and servers. Furthermore, the investment effect will spread to AI infrastructure-related companies (such as power generation equipment and fiber optics). Driven by earnings reports, the full-year 2026 S&P 500 EPS growth forecast has been significantly revised upwards (from 19.0% to 24.5%). From an industry contribution perspective, driven by increased AI demand and rising oil prices, the IT sector is expected to contribute 12.4 percentage points; communication services 2.9 percentage points; and the energy sector 2.3 percentage points. Overall profit growth expectations have significantly improved. The S&P 500, after hitting a record high in April, continues its upward trend. However, its forward 12-month price-to-earnings ratio (PER) is 21.4 times, still lower than the recent high of 23.3 times in October last year. In the short term, the market's pricing of high EPS growth expectations may have temporarily ended, and stock prices may consolidate at high levels; however, overall valuations are not significantly overheated, so if EPS expectations continue to be revised upwards, the stock market is still expected to rise in tandem. 

 
However, caution is warranted. Some hyperscale cloud service providers have included valuation gains from their investments in emerging AI companies in their financial reports as non-operating income, thereby amplifying EPS performance. Therefore, whether the market's pricing of profit growth is excessive warrants attention. Furthermore, some companies expect a significant decline in free cash flow (FCF). If companies rely more heavily on debt financing, investors will scrutinize more closely whether their capital expenditures can truly translate into profit growth. Furthermore, even if capital expenditures generate significant demand, supply constraints such as resource procurement and labor could suppress profit growth. If future corporate finances deteriorate (e.g., increased reliance on debt, worsening FCF) or AI commercialization falls short of expectations, there is a risk of significant stock price corrections, warranting vigilance.