S&P 500 Earnings Depend on AI Infrastructure Doing the Heavy Lifting

The second quarter wraps up today, and it was a good one. With the having returned more than 14% (including dividends) with just one trading day left, it will almost certainly end up being the best quarter for the index since the second quarter of 2020. Technology was the leader despite the June weakness.

As the quarter ends, corporate America closes its books and prepares to report results to the public over the coming months. First quarter results were spectacular, as S&P 500 companies collectively grew earnings per share (EPS) by 29%. Even excluding private equity gains on OpenAI and Anthropic shares held by mega-cap technology companies, we estimate last quarter’s earnings were up over 20%. Will companies deliver another blockbuster?

If earnings growth is going to again approach 30% — very possible with consensus estimates calling for 23% — the technology sector will have to do more heavy lifting. Memory chip maker (MU) did its part by growing earnings 12x and contributing to 4.5 points of S&P 500 EPS growth by itself. In fact, MU and (NVDA) are expected to drive 40% of overall S&P 500 EPS growth and, according to Goldman Sachs estimates, artificial intelligence (AI) infrastructure stocks are expected to contribute 60% of S&P 500 EPS (the technology sector is expected to contribute a similar amount). Besides technology, only energy, at 5.0%, is expected to contribute more than one point of S&P 500 EPS growth.

That strength from tech may not be surprising if you’ve been following earnings in recent quarters. What might surprise you, though, is that S&P 500 EPS growth excluding the Magnificent Seven — bolstered by the memory makers — was 17.5% in the first quarter and is expected to eclipse 20.5% in the second quarter (Q2).

S&P 500 Earnings Growth Excluding the Magnificent Seven May Exceed 20% in Q2

Source: LPL Research, Bloomberg 06/29/26

Ramp-Up of Profit Margins Is Equally Impressive

If earnings are going to hit consensus estimates in Q2 and the second half, margins will have to expand quite a bit — enough to convert low-teens revenue growth into at least double that pace of earnings growth. As shown in the “Profit Margin Expansion is Not Just a Technology Story” chart, margins excluding technology are on the way up. The productivity from AI should increasingly show up in the form of higher profit margins in the second half of 2026. Lower tariffs will also be helpful, although higher memory chip prices and energy and other bottlenecks in the Strait of Hormuz could erode company margins, particularly in the technology sector.

Profit Margin Expansion Is Not Just a Technology Story

Source: LPL Research, Bloomberg 06/29/26

Conclusion

The AI boom should drive another quarter of S&P 500 EPS growth near 30% when all results are in. The boost to oil prices from the Iran conflict will enable energy to chip in, but technology is expected to do most of the work. Like last quarter, investors will want to see returns on the massive AI investment. Margins will be closely watched, as they face several crosscurrents and are key to potentially keeping up this torrid pace of earnings growth as corporate America seeks out AI productivity gains.

History is clear on the rewards for strong earnings, because when S&P 500 earnings grow double-digits, the average annual S&P 500 index return is 14.3% with gains in 10 of the past 12 years. This year should make it 11 out of 13. The bursting of the dot-com bubble in 2000 and the Fed rate hike scare of 2018 were the only two years since 1990 when the S&P 500 was down despite double-digit earnings growth.. Although it is important to remember that past performance does not guarantee future results.

Double-Digit Earnings Growth Years Tend to Be Strong Ones for Stocks

Source: LPL Research, Bloomberg 06/29/26

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