Back to basics: Fundamentals take the lead in equity rally

Equity markets opened the week in familiar territory—at all-time highs—anchored less by exuberance and more by quiet confidence in the underlying earnings trend. With the S&P 500 crossing 6,300, what began as a narrative-led rally around AI, liquidity, and positioning is gradually receiving a shot of validation from corporate America.

We’re only just into the second act of earnings season—12% of S&P names have reported—but the early indicators are constructive. 83% of companies are beating consensus earnings estimates, not just marginally, but by nearly 8% on average. That’s materially above the 10-year average and suggests that many firms effectively managed expectations coming out of Q1. The blended YoY earnings growth rate for Q2 has already been revised up to 4.3%, with some desks projecting a print north of 8% when the dust settles.

Importantly, this is not just a one-quarter phenomenon. Next Twelve Month (NTM) EPS estimates have been rising, and forward earnings for the index just notched a record high of $284.36. Analysts are beginning to upgrade 2025 and even 2026 numbers—suggesting the rally isn’t merely built on positioning or short covering, but rather on genuine upward revisions to the fundamental outlook.

Part of this improvement owes to macro conditions aligning in subtle but supportive ways. The U.S. dollar has weakened roughly 10% from last year’s peak. That’s a tailwind for multinationals, especially with nearly 40% of S&P 500 revenue generated overseas. The impact of FX translation alone could add 2–3% to earnings, per macro models from top houses. In short, what was a headwind in Q1 has turned into a modest tailwind in Q2.

Treasuries, meanwhile, caught a bid—especially on the long end—with the 30-year yield falling six basis points to 4.93%. Traders are breathing easier now that Japan’s post-election turmoil hasn’t spilled into broader global risk. Bond desks had positioned for potential contagion; the absence of such risk has provided some relief.

The U.S. dollar has also come under pressure as markets begin to entertain political scenarios that were previously considered fringe. One such risk is the possible replacement of Federal Reserve Chair Jerome Powell in a second Trump term. Whether that’s a real probability or a tail risk, the market is beginning to price in some potential for a change in tone at the Fed. In such a scenario—where rate cuts are politically encouraged and institutional independence is questioned—short-end rates could fall while long-end yields rise, steepening the curve and complicating the policy signaling environment.

That backdrop creates fertile ground for assets like gold, which is quietly benefiting from both the geopolitical fog in Tokyo and the increasing politicization of U.S. monetary policy. While not front-page material yet, gold’s bid reflects a sense that investors are hedging tail risk early rather than reactively.

Back to equities—the setup going into this earnings season was notably cautious. Many firms had downshifted their guidance in Q1, citing tariff risk and macro uncertainty. That deliberate sandbagging has now created room for positive surprises. Even if some of the Q2 strength is the result of front-loaded demand—companies pulling forward orders to stay ahead of tariff timelines—the result is still stronger revenue and profit prints.

The key here is the shift in tone. Companies aren’t just clearing a low bar—they’re raising the forward bar modestly, and the Street is responding. In April, just 57% of companies saw their forward estimates revised upward. Today that number is closer to 75%. This is not just tech or the Magnificent Seven doing the heavy lifting. We’re seeing broader participation, with cyclicals, industrials, and select consumer names also contributing.

Valuation remains a topic of debate. But with the market pricing in at least two rate cuts by year-end, the multiple has room to stretch—especially if earnings growth continues to firm up. The Fed may not have pivoted yet, but the curve has moved ahead of policy, and equities are responding in kind.

In sum, this week’s action feels less like a euphoric melt-up and more like a market that’s methodically validating its gains. That doesn’t eliminate downside risk—tariffs, geopolitics, and political volatility remain—but it does suggest that the underlying corporate performance is strong enough to warrant current levels, at least for now.