US Companies Deliver Strongest Earnings Surprise Since Early 2022

Small caps take the spotlight with unexpected gains, reshaping investor sentiment

Biggest Earnings Beat in Over Three Years

US companies have delivered their most significant earnings surprise since the first quarter of 2022, according to new data from Jefferies. The second-quarter results saw a substantial 12.3% difference between actual and expected earnings growth, signalling renewed momentum across the corporate landscape.

This positive surprise has reignited optimism in small and mid-cap stocks, which have long been overshadowed by their large-cap counterparts. Now, market watchers are predicting a shift in investor focus heading into the third quarter.

Small-Cap Stocks Outshine Expectations

Jefferies highlighted that over 80% of small-cap firms have now reported their results, and the majority have exceeded expectations.

Key highlights include:

• Consensus expectations had predicted a 2.1% decline in small-cap earnings.
• Actual results show positive earnings growth, reaching 6.6% excluding energy stocks.
• Around 50% of small-cap firms beat consensus estimates by at least one standard deviation.
• Fewer than 16% of small caps disappointed, showing strong overall resilience.

Even small-cap revenue, which often struggles during periods of economic uncertainty, is expected to finish in the black. Companies that exceeded expectations on both revenue and profit saw the most significant share price rewards.

Mid-Caps Show Steady but Subdued Performance

The mid-cap segment also posted solid results, though slightly less impressive than small caps.

• Mid-cap earnings are running 6.3% ahead of consensus forecasts.
• However, profits are still expected to fall by 0.7% overall.

This indicates that while mid-sized companies are showing some signs of strength, they are not yet at the level needed to drive broader market leadership.

Mixed Results for Large-Cap Giants

Large-cap companies remain a mixed bag, with stark differences between top performers and the rest of the field. Jefferies drew attention to its so-called “Sweet 16” – a group of high-performing companies delivering exceptional results.

Performance breakdown:

• The Sweet 16 saw 24.3% earnings growth and 14.8% sales growth.
• The remaining S&P 500 companies delivered 7.6% earnings growth on 4.9% sales growth.
• Overall large-cap earnings beat expectations by 8.7%, the best since Q3 2021.

This gap underscores the widening performance divergence within the large-cap space, where only select leaders are outperforming.

Outlook: Small and Mid-Caps Poised to Lead

Jefferies now forecasts that small and mid-cap equities will lead market performance heading into the third quarter. With large-cap growth becoming increasingly concentrated, investors may begin to rotate towards smaller firms that offer more undervalued opportunities and earnings momentum.

Conclusion: A Changing of the Guard?

The strong Q2 earnings season has triggered a possible turning point in market leadership. With small-cap and mid-cap stocks surprising to the upside, this could mark the start of a broader shift in investment strategy away from mega-cap dominance.

Investors looking for long-term growth potential may want to re-evaluate their portfolios and consider exposure to underappreciated small and mid-cap equities, particularly in sectors benefiting from cost efficiencies, innovation, and post-pandemic recovery trends.

Sources: (Investing.com, Reuters.com)