US Earnings Face High Bar as Tech Margins Compress
As US second-quarter earnings season begins, record-high profit expectations leave the S&P 500 vulnerable to a correction if tech giants fail to prove their massive AI spending is generating returns.
Goldman Sachs and JPMorgan Chase report on Tuesday, marking the start of a pivotal US earnings season. S&P 500 profits are projected to jump 24% in the second quarter, a level typically only seen exiting major recessions. However, the benchmark index sits near all-time highs, leaving no margin for error.
The market's 10% gain in 2026 has been unusually broad, with the Magnificent Seven tech giants lagging at just 3.2%. Analysts aggressively raised estimates heading into the reports, with nearly 64% of benchmark constituents seeing upward revisions in May. "The market is in an unusually delicate position," said Violeta Todorova of Leverage Shares, noting that in-line results "will be treated as a disappointment."
The core tension lies in artificial intelligence. Chipmakers are expected to post 136% earnings growth, yet the MSCI World Semiconductors & Equipment index has dropped 6.1% since hitting a record in late June. Profit margins for the Magnificent Seven are projected to plunge to 27.7% from 36.2% in the prior quarter as the largest tech firms spend over $700 billion on AI infrastructure.
Historically, tech firms offset dilution through aggressive buybacks, but that dynamic is reversing. Microsoft, Meta, and Apple all saw their share floats climb in the second quarter, while Alphabet executed an $85 billion stock offering. "After roughly a decade of net share-count shrinkage from corporate buybacks, especially in tech, the supply picture is shifting," said Ameriprise’s Saglimbene.
These corporate pressures arrive as sticky inflation and the end of a US-Iran ceasefire push energy costs higher. Profit margins are expected to shrink across most S&P 500 sectors as the odds of Federal Reserve rate hikes increase. Outside the US, the picture is brighter, with MSCI Asia Pacific profits estimated to surge 39%, aided by lower crude costs that benefited oil importers like India and Taiwan.
