The S&P 500 closed Monday with a modest decline of 0.19%, settling at 7,443.28, following a weekly loss of 1.55% that marked its first negative week in three. The index remains 2.2% below its record close from June 2, as investor attention sharpens on the outsized role of semiconductor stocks in driving overall earnings growth.
Early Q2 earnings results have been robust, with 88% of the initial 10% of reporting companies surpassing EPS estimates, and aggregate profits exceeding expectations by 16.4%. These figures compare favorably to five-year averages of 78% and 7.0%, respectively. However, the broad market has failed to capitalize on this strength, with gains limited by concentration risks.
FactSet (NYSE:FDS) data underscores this dynamic: the preliminary blended Q2 growth estimate stands at 24.7%, but excluding semiconductor giants Nvidia (NASDAQ:NVDA) and Micron (NASDAQ:MU), that figure drops to 16.8%. Together, these two companies account for 7.9 percentage points of the total growth. LSEG (LON:LSEG) data further reveals that semiconductor earnings are projected to surge 133% year-over-year, contributing 44% of overall S&P 500 profit growth.
Despite this earnings momentum, stock prices tell a different story. The PHLX semiconductor index, which had soared 65% year-to-date through Friday, has dropped 18% in July alone. On Monday, it edged up 0.6% after closing more than 20% below its late-June peak. This divergence between earnings performance and market pricing highlights growing investor skepticism about the sustainability of AI-driven growth.
“The daily moves for companies this large are really surprising,” said Rick Meckler of Cherry Lane Investments. “A disappointing outlook could quickly alter the earnings landscape.”
Adding to the pressure, oil prices and bond yields rose on Monday. Brent crude gained 1.3% to $89.22 per barrel, while the 10-year Treasury yield climbed four basis points to 4.59%. Higher discount rates reduce the present value of future earnings, further weighing on valuations.
Market breadth was negative, with declining stocks outpacing advancers on the NYSE by a ratio of 1.72 to one. The focus now shifts to upcoming earnings reports from key technology and chip companies. Alphabet (NASDAQ:GOOGL) and Texas Instruments (NASDAQ:TXN) are scheduled to report on Wednesday, followed by Intel (NASDAQ:INTC) on Thursday. FactSet projects 86 S&P 500 companies will release results this week.
Investors will scrutinize Alphabet’s capital expenditure plans and monitor chipmakers’ order backlogs for signs of sustained AI demand. These factors could either validate or challenge the projected 44% profit growth from the semiconductor sector. The economic calendar remains light ahead of Thursday’s jobless claims data, with flash business surveys and June new-home sales due Friday.
Risks are balanced: rising oil prices or geopolitical escalation could push yields higher and compress valuations, while a ceasefire might ease those pressures. However, a softer AI outlook remains the more significant equity risk. This week’s earnings reports will provide critical clues on whether the profit engine can continue to support current market prices.
