Second-Quarter Earnings Show Breadth

For markets, the artificial intelligence (AI) trade has been the dominant theme for the last couple of years. But it has shifted this year.

Last year's story was about the AI hyperscalers – the handful of mega-cap tech companies spending hundreds of billions to build out AI infrastructure. 

This year, investors have rotated one step back in the supply chain. The "picks-and-shovels" trade is here, and chipmakers are the biggest beneficiaries.

One constant, though, is that there’s been strong earnings growth underpinning this AI trade all along.

In fact, the earnings strength we’ve seen in the AI hyperscalers and now chipmakers is accompanied by a broad-based strength across U.S. equities this year and in second-quarter earnings. 

SOX semis index sees price return and earnings moving in lockstep

A key measure of chips stocks is the PHLX Semiconductor Sector Index™ (SOX™), and it’s up about 60% year-to-date. That's a remarkable number. But what's more remarkable is what's behind it.

SOX™ earnings are up over 60% this year (in just two quarters) – roughly in line with the price gain. And analysts project another 75% earnings growth by the end of next year. So, it’s been fundamentals driving this rally.

Chart 1: Chips stocks’ prices and earnings are both up about 60% this year 

That’s also the key difference from the dot-com bubble. In 1999, valuations were running well ahead of earnings (if there were any earnings). Now, earnings are supporting price gains. In fact, for many sectors this year (including the SOX™), price-to-earnings (P/E) multiples are actually falling as earnings rise faster than stock prices (Chart 3).

Nasdaq-100® earnings breadth is at 4½-year high

The attention on the chipmaker rally can obscure something worth highlighting — earnings growth in 2026 has become remarkably broad-based.

As of the second quarter, over half of all Nasdaq-100® companies reported earnings growth of at least 20% per annum (p.a.). More than four in five reported positive earnings growth. Both are the highest readings since the fourth quarter of 2021 — going back to the early post-Covid recovery.

This breadth has helped push Nasdaq-100® earnings growth near 80% p.a. in the second quarter — its strongest earnings growth since 2010, when companies were recovering from the depths of the global financial crisis. 

Chart 2: Earnings breadth pushing Nasdaq-100® near 80% p.a. earnings growth

Of course, there are some special circumstances here, with earnings boosted by tariff refunds and marking to market holdings in private companies like Anthropic. Still, even without these factors, large-cap earnings are robust.

For large caps, earnings are outpacing returns

With the SOX™, the Nasdaq-100® and the S&P 500 all near record highs, it's natural to wonder whether valuations are getting stretched. The data says no — in fact, they’re compressing.

Across the major large-cap indexes, forward earnings growth has been outpacing price returns year-to-date. That means P/E multiples are falling as earnings climb faster than prices. That's true for the hyperscalers, the chipmakers, and the broader Nasdaq-100® and S&P 500.

Chart 3: Large-cap earnings outpacing price growth, compressing PEs 

For mid and small caps, markets are betting on stronger earnings

The valuation story is a little different once you move down the market cap spectrum.

For mid caps (S&P 400), P/E multiples are flat year-to-date. For small caps (S&P 600), they're up nearly 5%. In other words, prices have been rising in line with or a bit faster than earnings for these groups – at most, a modest degree of multiple expansion.

Multiple expansion, when it's modest, often reflects investors pricing in expected earnings improvement rather than paying for growth that has already arrived. And there are good reasons to expect it. Earlier rate cuts are feeding through to smaller companies, which carry more floating-rate debt than their large-cap peers. Wage growth is cooling. Tax tailwinds are flowing through to corporate earnings. 

Market’s strength goes well beyond chips and AI

So, what do we make of all this?

The SOX™ is the latest headline act and the earnings behind it are real. But framing 2026 as purely a chips or AI story misses most of the picture. 

The broader market resilience reflects macro tailwinds doing serious work. That combination has lifted a far wider set of companies than the headlines suggest.