Recently I saw Steven Spielberg's newest film, “Disclosure Day.” The premise is that while the existence of aliens has been known by parts of the government for some time, a battle ensues between two sides: those who want to disclose it to the general public vs. those who want to keep it a secret. In the background, throughout the movie, news scenes show the world getting closer to a dangerous conflict. I’ll stop there, though. I don’t want to sway your opinion before you’ve seen it. You might not like it as much as a result, because I would have set an expectation for you.

I think about this when it comes to markets, too. The phrase I repeat the most when it comes to investing is: “expectations are everything.” Like the audience for a movie, markets react to company news relative to their expectations—whether it’s consensus revenue, earnings and guidance expectations, or so-called “whisper numbers” rumored right before a company reports their earnings. In an absolute sense, a company might have strong earnings, but if that was already expected, they have to do better. If a company is expected to lose money and they lose less, you’ll often see the stock go down.

But recently, expectations have leveled up. The market seems to no longer be rewarding beats alone, only beats with improving forward visibility. Take Nike and Samsung as examples, who recently reported earnings. Each beat earnings expectations for the quarter, but sold off on weak guidance or just numbers that were good but not spectacular.  

And all the larger important companies will begin reporting, starting with the banks next week, and moving on to tech in the following weeks. Many with the highest expectations we’ve seen, ex the bounce after covid. 

Based on Factset data, consensus is projecting ~24% S&P 500 EPS growth for Q2, up from 18% at the end of March. This pattern of rising expectations can also be seen for Q3 and Q4. For the full year 2026, EPS growth is expected at around 24%, up from 16% at the end of March.

As you might guess, tech and energy are the biggest drivers of the uplift. For tech, it's across various industries. And since tech is the largest sector, a double-digit increase (from 34% to 48%) powerfully contributes to index growth expectations. For energy, it is a small sector at only 3% of the S&P, but estimate revisions are very large—from 18% expected earnings growth to 66%. 

The five largest positive estimate revisions within tech companies are in memory and the legacy tech names, which are currently having a renaissance:

Within energy, the revisions are generally broad, but highest among the actual producers of oil and gas, as they most directly benefited from their higher prices (even if they are no longer at a peak). 

As an investor with this knowledge, you are then presented with a question: have expectations gotten to a level that will more likely lead to disappointment, even if results are good, or will these stocks beat the higher expectations? I believe it may be an earnings season of surprises, both positive and negative, that could exacerbate the current rotation within the AI trade. I expect this to create a healthy washing out (not a bear market), which sets up for another leg higher in the AI-oriented names. Be sure to know when your names report and what’s expected of them.