Earnings Watch: AI Drives Highest Earnings Growth in Years

Key Takeaways

Corporate earnings growth surged during the first quarter of 2026 as artificial intelligence (AI) fueled profits for mega-cap technology firms.

The S&P 500^® Index experienced its largest jump in earnings growth since late 2021.¹ Companies in the index reported some of their best net profit margins in years.² Earnings-per-share (EPS) forecasts also saw upward revisions.³

In our view, this earnings season presents a constructive fundamental backdrop for investors. At the same time, the dispersion in results across companies and sectors shows the need for selective positioning.

Among this quarter’s highlights:

• About 84% of companies in the S&P 500 beat analysts’ estimates.⁴ The strongest sectors were consumer discretionary, communication services, information technology (IT) and materials. Health care and energy were areas of weakness.

• Emerging markets posted positive earnings growth, stronger than the previous quarter.⁵ IT, utilities and materials were the leading sectors. Consumer discretionary and communication services were the weakest.

• In Japan, profit growth accelerated, led by consumer staples, materials and real estate.⁶ Health care and utilities were sources of weakness.

• Europe recorded positive earnings growth.⁷ Energy, communication services and financials were the strongest sectors. Real estate and consumer discretionary were the weakest.

Five Takeaways from Q1 Earnings Reports

1. AI Powers Earnings Season

Hyperscalers — the mega-cap tech firms investing heavily in AI models and infrastructure — reported robust first-quarter results.

Companies such as Alphabet, Amazon and Meta Platforms were leading contributors to the surge in the S&P 500’s earnings growth rate, according to FactSet.⁸

Alphabet said its revenues increased by 22%, with its cloud business up 63%. The company credited AI as a major driver of the gains.⁹

“Our AI investments and full-stack approach are lighting up every part of the business,” CEO Sundar Pichai said. “Search had a strong quarter with AI experiences driving usage, queries at an all-time high, and 19% revenue growth.”

2. Net Profit Margins Hit Their Highest Levels in Years

The largest firms’ AI spending remains robust. However, this could lead to increased pressure from investors if future capital expenditures cut into company margins too deeply.

Generally speaking, margins weren’t a problem in the first quarter.

For the first three months of 2026, the S&P 500’s average net profit margin was the strongest since FactSet began tracking it in 2009.¹⁰

AI’s impact could be seen here, too. Among all sectors, IT logged the largest year-over-year increase in net profit margin.

3. Growth Extends Beyond AI

Earnings growth wasn’t limited to the big players in AI. Other companies also posted better results, even if they didn’t reach the levels of Alphabet or Amazon. Most sectors reported earnings growth.¹¹

Stronger growth could be seen across market capitalizations as well. Large-cap, mid-cap and small-cap stocks all participated, as shown in Figure 1.

Figure 1 | Large-Cap Stocks Led Earnings Per Share Growth

Cumulative Change in Analysts’ Next 12-Month Earnings Estimates

^{Data from 1/3/2022 – 5/3/2026. Source: Bloomberg. The S&P 500® Index represents large-caps. The S&P MidCap 400® Index represents mid-caps. The S&P SmallCap 600® Index represents small-caps. Past performance is no guarantee of future results.}

4. The Rise of Agentic AI Could Support Future Earnings Growth

More companies are adopting agentic AI, which can plan and execute tasks with little or no human oversight. This type of AI requires greater investment in central processing units (CPUs) and memory, which could spur growth for select companies.

Morgan Stanley Research now estimates the total addressable market for CPUs will reach at least $125 billion by 2030, up from more than $100 billion. Demand for dynamic random-access memory (DRAM) could grow by 70%.¹²

AMD, Arm Holdings and Intel are seeing higher demand for their CPUs, just as demand for high-bandwidth memory stands to benefit Hynix, Micron and Samsung.

Arm Holdings, for example, reports that demand for its Arm AGI CPU has more than doubled, reaching $2 billion.¹³

“As AI is moving from human-based queries to continuous agent-driven workloads, this shift is expanding the role of the CPU,” Arm Holdings CEO Rene Anthony Andrada Haas said. “These agentic workloads require CPUs to coordinate tasks, move data, manage memory, enforce security and orchestrate work around accelerators.”

5. Macroeconomic Risk Hangs Over Upcoming Quarters

Despite a strong first quarter, the global economy remains vulnerable to disruptions from the war in Iran.

Much of the risk depends on how long the Strait of Hormuz, a vital conduit for oil and gas shipments, remains closed. Energy prices have soared, and they’re poised to ripple beyond the gas pump and into the larger economy.

Take Starbucks, for example, which reported positive results on its most recent earnings call. Company leadership is confident in the coffee chain’s turnaround, but they’re also keeping an eye on the broader economy.

“We haven’t seen a lot of the macro effects trickle into consumer behavior as it relates to Starbucks,” CEO Brian Niccol said.

“But I think we want to be cautious going forward because we’re not sure how this will play out as the issues continue to happen, whether it shows up in gas prices or utilities, or in other ways or other input costs like fuel costs.”¹⁴

Earnings Forecast: EM Growth Could Outpace Other Regions

Analysts predict 57.71% earnings growth in emerging markets for the second quarter and 38.34% for the full calendar year.¹⁵

Meanwhile, forecasts call for S&P 500 earnings growth of 20.11% for the second quarter and 21.37% for the year.¹⁶

Analysts expect European earnings growth of roughly 15% for both the second quarter and the full year.¹⁷ Japan’s earnings growth is forecasted at 21.06% in the second quarter and 9.30% for the year.¹⁸