Earnings Surge “To Infinity and Beyond”

Commentary

Economist Ed Yardeni headlined this current AI-fueled rally as a surge “To Infinity and Beyond!” I agree.

Memory-related stocks like Micron Technology (MU) and Seagate Technology (STX) were especially hot last week. Super Micro Computer (SMCI) also got AI investors excited after it announced its latest quarterly sales rose 122.6% to $10.24 billion, compared with $4.6 billion in the same quarter a year ago. During the same period, the company’s earnings rose 324% to $483.4 million, or 72 cents per share. The company posted a 17.3% sales miss and a 34.5% earnings surprise, but what really got investors excited was quarterly sales guidance of $11.75 billion (above consensus estimates of $10.92 billion) and earnings guidance of $0.72 a share (vs. estimates of $0.56). Also, their operating margins are expanding. For its current quarter, SMCI is estimating 6.1% in operating margins, almost double the 3.2% from a year ago.

With earnings and subsequent stock gains rising like this, we may want to pinch ourselves to verify we are not dreaming. Our portfolios do not often soar by 20% a month (although it actually happened once before, in 1999), but this earnings environment is truly extraordinary, so please enjoy this earnings surge while it lasts. Due to rising order backlogs and strong forecasted earnings, I expect this party to persist until the end of this year, making 2026 just as strong as 1999, a year when we saw many of our portfolios rise by over 100%. We may see some market bumps after Nvidia (NVDA) announce their quarterly earnings on May 20th, next week, but every dip in Nvidia has proven to be a buying opportunity, in my opinion.

Here are the most important developments recently and what they mean:

– President Trump’s trip to China, which commences on Thursday, is essentially a big Chamber of Commerce trip. He will be accompanied by key cabinet members, like Treasury Secretary Scott Bessent, as well as business leaders like Nvidia’s Jensen Huang, Apple’s Tim Cook, Tesla’s Elon Musk and Exxon-Mobil’s CEO. There is undoubtedly a new world order with the U.S. now dominating world energy markets and China’s military influence waning after its equipment proved to be ineffective in Iran. So, President Trump is expected to have a bit of swagger, strive to assert American dominance, and book business deals for many American companies.

– The Atlanta Fed’s GDP estimate for the second quarter is now 3.7% but is expected to rise in the upcoming weeks. In fact, Kevin Hassett, the head of the Council of Economic Advisors, on Fox News said, “I think we really could be looking at numbers north of 4, north of 5, north of even 6 because there’s so much capital stock growth right now.” He added that “Once we turn those factories on, you’re going to see really growth unlike anything we have seen before.” The bottom line is that all the onshoring is about to result in record GDP growth in the upcoming months.

– The bond vigilantes are increasingly focused on Britain after Prime Minister Keir Starmer signaled that he would not quit after the Labour Party suffered a devastating defeat in local elections by Nigel Farage’s Reform UK party. Due to this “Reformquake” that had humiliating defeats, especially in Scottish and Welsh elections, Labour MP David Smith and MP Catherine West are calling for a leadership election. As more Labour Party MPs abandon Prime Minister Starmer, a new election is inevitable. In the meantime, Britain is adrift without effective leadership, so its gilt (bond) yields are rising and are expected to increase economic anxieties.

– The Labor Department on Tuesday announced that the Consumer Price Index (CPI) surged 0.6% in April and 3.7% in the past 12 months. The core CPI, excluding food and energy, rose 0.4% in April and 2.8% in the past 12 months. Food prices rose 0.5% in April, while energy prices soared 5.6%. The core CPI came in a bit hotter than economists expected, but Treasury yields did not rise significantly. Shelter costs (owners’ equivalent rent) surged 0.6% in April after cooling for the past few months. This surge in shelter costs is being blamed for a lack of data collection during the federal government shutdown, which is skewing data. Overall, this was a confusing CPI report, but since inflation has been moderating since the March CPI spike, I suspect that investors will refocus on record earnings results. Fortunately, stocks are a great historical inflation hedge.

Overall, when there is uncertainty, an investor’s best defense remains a strong offense of fundamentally superior stocks. The encore to this stunning earnings announcement season is expected to be Nvidia (NVDA) and Micro Technology (MU), which in turn will mean that the S&P 500 will announce a staggering 20+% earnings growth in the first quarter. Since the order backlogs are growing for data center and AI-related stocks, the earnings in the upcoming quarter are now forecasted to be potentially even stronger.