Every day in the stock market is a tug of war between competing narratives, but only one story really matters right now. This is investment reporter Tim Shufelt filling in for Scott Barlow and today we’re talking earnings. We’ll also look at the investment case for insurers over the big banks. Plus, if you want to age better, have you considered walking faster?
Corporate profits
Earnings bring the heat
We’ve got a new investing acronym to consider, courtesy of strategist Ed Yardeni: FEMO, for Fabulous Earnings Momentum. I’m not sure it has the staying power of TINA, TACO, or FOMO, but it gets to the heart of what is sustaining the stock market in the face of powerful headwinds.
We’re pretty much through earnings season in the U.S. and the numbers are absurd. After S&P 500 companies posted growth in earnings per share of 19 per cent in the first quarter, second-quarter growth stands at 47 per cent, year over year.
To state the obvious, it’s not normal for the largest companies in the world to see their profits rise by half. Outside of recoveries from recessions, it just doesn’t happen.
So explosive is profit growth, it almost doesn’t matter what is happening from a macro perspective. War, the run-up in energy prices, new fears over inflation and the tools central bankers may need to use to fight it, long-term bond yields climbing to their highest levels in two decades, and fears over an AI bubble — all of it is overshadowed by earnings.
And so we are in the midst of an “earnings-led meltup,” Yardeni says. He raised his year-end target for the S&P 500 to 8,400, which would represent another 8-per-cent gain from current levels. If that forecast proves accurate, it would bring the calendar year gain in U.S. stocks to 23 per cent.
Such numbers rightfully make some folks nervous. The only thing keeping valuations in check, and thus preventing a stock market bubble, is one of the greatest runs in corporate earnings we’ve ever seen.
To that end, here are a couple of pressure points to bear in mind.
Mark-to-market gains
A decent chunk of earnings growth can be chalked up to an accounting quirk. Many of the tech giants have stakes in private AI companies, like Anthropic and OpenAI, which provides an earnings boost when those investments rise in value.
Amazon.com posted a 240-per-cent jump in EPS, in part because of more than US$50-billion in paper gains from its stake in Anthropic.
Strip away the mark-to-market gains, and second quarter S&P 500 earnings growth shrinks to 26 per cent.
But crucially, earnings estimates for the year ahead, which is largely what the market is trading on, do NOT include these paper gains. And even without them, Wall Street is anticipating a 14-per-cent jump in earnings in 2027.
Free cash flow is vanishing
Even though earnings are plentiful, the AI spending spree is draining Big Tech of its cash flow. Through this lens, reasonable valuations no longer look so reasonable, since investors are paying up for dwindling, even negative, free cash flow, says Eric Lascelles, chief economist at RBC Global Asset Management.
As the investment cycle matures, this will be the metric to watch, he said. “With less free cash flow available, the margin for error for these companies is smaller now, and any disappointment in future monetization of the enormous CapEx being directed toward AI compute capacity would pose a risk to stock prices.”
Financials
Insurers > banks?
Back in March, Craig Basinger, chief market strategist at Purpose Investments, made the case for getting a bit more cautious on the big Canadian banks and a bit more constructive on insurance companies. His point was that, after a monster run in 2025, during which Canadian bank stocks gained 45 per cent, the group was looking a bit pricey.
Since then, the S&P/TSX Composite Bank Index has stormed ahead another 30 per cent. The big banks now look about as expensive as they’ve ever been, with an average forward price-to-earnings ratio of nearly 16.5, compared to a 20-year average of around 11 times.
The big four lifecos, meanwhile, trade at a sizeable discount to the big banks with an average P/E of about 13.5. Plus, the group came out of earnings season looking good, with all four beating consensus expectations, said CIBC analyst Paul Holden.
“We continue to recommend lifecos over banks, premised on macro factors (equity markets and interest rates), potential upside to expectations, and relative valuations,” he wrote.
His top picks in the sector are Manulife Financial Corp. (MFC-T) and Great-West Lifeco Inc. (GWO-T)
Diversions
Walk this way
Want to be the smartest person in the retirement home? Try walking with a full head of steam.
A new study published in Neurology magazine found that “super movers,” or those with walking speeds well above average, tend to age better and show fewer signs of memory loss.
The analysis, which involved more than 4,000 adults, showed remarkable differences between super movers and those with slower gaits. The brisk cohort were 50-per-cent less likely to show cognitive decline.
So get out there and start walking like you’re late for bingo.
The essentials
Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.
Globe Investor highlights
Economist David Rosenberg thinks the TSX is a better bet right now than U.S. stocks
Jamie McGeever explains why investor hedging against the risk of U.S. hyperscalers’ defaulting on their mushrooming debt isn’t all that alarming
Jamie also looks at why twists in the U.S. yield curve are exposing a major rate dilemma for Trump and Bessent
What’s up next
Read this week’s earnings and economic calendar here