Santoli: Earnings bonanza that lifted market to record may not be all that it appears to be

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Three weeks into a perky rebound that pushed stocks to fresh records, it’s time for the market to prove that blessed relief can give way to genuine belief.

The comeback since late July, with the S&P 500 up more than 6% in 12 trading days, has been what I call a “Subtraction of All Fears” rally.

These worries weighed down the indexes a few weeks ago: That the leading tech platforms would be further punished for their ever-escalating AI investments; the semiconductor buying frenzy turned into a burst bubble; and the Federal Reserve would need to chase inflation with higher rates.

Strong cloud-services growth revealed in hyperscaler earnings met reduced stock valuations to drive a tension-relief rally in the Mag 7. Semis have responded to washout technical conditions to recoup a bit less than half of their 30% five-week collapse. And benign inflation readings combined with iffy payrolls and retail-sales data have curtailed market expectations for Fed rate hikes.

Thus, the relief, and the rush to add back equity risk by both retail and professional money.

John Kolovos, head of technical research for Macro Risk Advisors, whose sentiment gauge is featured below, had been on alert for a possible market breakdown last month. But he notes that Big Tech earnings made a “kick save” for the indexes a few weeks ago. He now expects the S&P 500 can “thread the needle” to 8300 (up 6-7%) by early next year, with some likely chop in late summer. Kolovos thinks momentum stocks can extend their tactical rally and Chinese shares are a Buy for those willing to take that leap.

Is the earnings surge for real?

Analysts and strategists are now ceaselessly gushing about the geyser of reported corporate profits that swamped second-quarter forecasts and has the bulls feeling quite virtuous, redeemed by the fundamentals.

Fair enough; this is surely supportive of the tape, all else equal.

But I can’t escape the nagging possibility that this bonanza could turn out to be companies “over-earning.” It’s not simply that the results were flattered by markups of tech giants’ stakes in OpenAI, Anthropic (companies that need vastly more financing to meet all their spending commitments that are fattening the order books of AI infrastructure players).

The gaudy numbers also represent booked revenue for data-center buildouts funded by hyperscalers’ past earnings and current forgone free cash flow, revenue against which expenses will only be recognized in future quarters. Then there’s the one-time energy-sector earnings surge on wartime supply interruptions, and the fact that many companies were lapping tough results from the “Liberation Day” chaos in the second quarter of 2025.

Earnings forecasts for now keep rising, of course, so the moment of reckoning is not likely here. Still, I’d proceed under the assumption that we’ve seen a valuation peak for the indexes, if not a crest in index levels.

The S&P got to 23-times forward earnings last October, jacked by a comprehensive AI optimism, declining Treasury yields and mega-cap dominance. That P/E also reflected the market anticipating the very profit acceleration we’ve since seen.

Now, at around 20, the P/E might have trouble rising much given the perceived zero-sum aspects of AI competition, the lack of much tech free cash flow for the foreseeable and the new “asset-heavy” nature of their businesses.

Oh, and the S&P industrial sector already trades at a 25x P/E, far higher than any time this century except when profits crashed during Covid, making it a bit tough to look there for further upside help.

Which stage of the bull?

These asterisks don’t blot out all the positives, nor do they negate the sturdy tape action itself: The S&P 500 holding its breakout to new highs, the harmonic sector rotation, decent market breadth, regional-bank stocks hitting new highs, software firming up on reports that private capital is sniffing around some bellwether names.

Scott Rubner, Citadel Securities head of equity and equity-derivatives strategy, sent out his widely studied August flows report, detailing what he sees as a constructive setup for now with several sources of demand converging: Retail traders rebuilding exposure after selling heavily at the late-July lows, systematic funds keying off suppressed volatility readings, corporate share repurchases.

He concludes: “A market that spent much of the year absorbing selling pressure can begin to rebuild buying capacity” through this month. “September may be a different conversation.Seasonality gets harder, positioning may be fuller, and if August turns into a chase, some of today’s buying capacity will already have been deployed.”

Warren Pies, co-founder of 3Fourteen Research, last week cut equities to a neutral weight in his recommended model. He’d flipped to an overweight position in mid-April, just in time to catch a 10% S&P 500 gain in four months. He now sees the market pricing of a possible Fed hike as too low.

Such cautionary sentiments could well be premature. It’s inherently hard to discern mid-cycle meanderings from late-cycle sputtering. And I concede that when it comes to market recovery rallies, by temperament I “only like the beginnings of things,” as Dr. Faye Miller said of Don Draper in “Mad Men.”

Still, it never hurts to follow this trusty credo: Stay involved but keep expectations in check.

This indicator from John Kolovos of Macro Risk Advisors uses several data points to reflect both what investors are saying and what they are doing.

Kolovos on the latest reading: “From a sentiment perspective, while we never got that capitulative sell off, the overly bullish sentiment that dominated the marketplace heading into June, has been neutralized, which is good enough to get the market to grind higher.”

—I’ve noted for years the unusual frequency of S&P 500 pullbacks that have stopped just short of losing a full 20% on a closing basis – the simplistic definition of a bull market. As noted in this helpful LinkedIn post by Mike Taylor of Pie Funds, counting the 19% drops (or ones where there was at least a 20% decline on an intraday basis) cuts some of the longest-ever historical bull markets into shorter ones.

Still, it’s hard to draw conclusions about how much is left in the current one, which turns four in a couple of months. For as much data as the market yields over the decades, there just have not been enough cycles to achieve a truly reliable statistical sample.

—Major League Baseball’s annual Field of Dreams game, held last week on the Iowa cornfield diamond used for the 1989 film, is an amusing new tradition and rare example of MLB creating clever, popular in-season marketing occasions.

It’s also a chance for me to air one of my less-popular takes: “Field of Dreams” is not a top-five baseball movie.

Sentimental favorite, sure, but too syrupy in its bid to warm hearts. Having read the novel it was based on, “Shoeless Joe” by W.P. Kinsella, as a teenager, I could never get past the way it turned the father-son relationship into an excuse to relitigate the culture clash between Boomers and their parents, among other objections.

My top five baseball movies: “Eight Men Out,” “The Natural,” “Bull Durham,” “Major League” and “Bang the Drum Slowly.”

Kinsella also wrote a genuinely weird, fascinating, somewhat magical-realist novel, “The Iowa Baseball Confederacy” that’s worth the time. Pretty sure it was at least partial inspiration for the acclaimed indie baseball film “Eephus” from last year.

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