This Is the Best Earnings Season in Years. Here's Why That's a Problem.

Apple (AAPL) reported earnings after the close on Thursday and the stock is up roughly 3% in pre-market trading. Revenue came in at $111.2 billion versus the $109.7 billion consensus, which is 17% year-over-year growth for the giant firm.

iPhone revenue was $57 billion, up 22%, despite supply constraints. Services hit a record $31 billion, up 16%. EPS was $2.01, ahead of the $1.94 estimate. Apple also authorized $100 billion in additional buybacks and bumped the dividend 4% to $0.27.

The numbers were fine. But the Q3 revenue guide of 14% to 17% year-over-year growth is what moved the stock. Analysts were looking for just 9.5% growth. That is a strong guide for a company many had written off as a non-AI play.

Tim Cook flagged that memory costs will be a meaningful headwind in the June quarter and beyond, which is proof of the massive AI capex cycle and will continue to be a tailwind for the semiconductor sector.

The Best Earnings Season in Years

More than 70% of large U.S. companies have now reported, and according to The Wall Street Journal, this is looking like the best earnings season in years. S&P 500 earnings per share are tracking a gain of roughly 19% for the quarter, nearly twice the average pace of the past decade. FactSet shows net profit margins at their highest level in 15 years.

That is the kind of headline you would expect to be unambiguously bullish. The WSJ piece suggests that may be a problem, and the historical data is worth studying. When you sort the months by year-over-year earnings growth, the best forward stock returns came when fast earnings growth followed a sharp recession. In other words, fast growth coming out of a recovery is the best catalyst for stock prices.

The setup we have now is different. We are already deep into an economic boom, not coming out of a recession. Rapid earnings growth late in a major bull market is often a problem for stocks.

The list of comparable periods is concerning: July 1929, December 1973, March 2000, and early 2007. Outside of post-recession recoveries, there has been an inverse relationship between how fast earnings just grew and how stocks performed over the next 12 months.

The problem is that analysts tend to be too optimistic with their forecasts when the cycle is hottest. What happened during the internet bubble is instructive. In late 1999, the bottom-up consensus for earnings growth in 2000 was 15%. The actual number came in under 4%. In late 2007, the consensus was 16%. Earnings then collapsed by about 75% during the financial crisis.

Current analyst estimates are 19.5% for 2026 and 15.7% for 2027. The lesson here is to watch carefully for signs that these estimates are coming down. That won't be an immediate problem, but it is something to start thinking about when we head into the June quarter reports.

I am not rushing to predict a major top. On the contrary, strong markets stay sticky to the upside, and we have an AI capex cycle that is still in its early innings. There are no signs yet that analysts' estimates are too optimistic, but the data is the data. Margins at 15-year highs are a number to watch. It is another good reason to be picky about new buys rather than to chase.

Oil and Inflation Stay in the Mix

Another key issue to watch is that oil prices and the U.S.-Iran conflict continue to present big near-term inflation risks. Core PCE for March came in at 0.3% on the month and 3.2% on the year, with headline at 3.5%, in line with expectations and well above the Fed's target.

Oil reversed lower on Thursday, which helped the tape, but it is back up a little early on Friday. The blockade story is not going anywhere quickly. As long as that situation drags out, inflation worries could trigger some sudden profit-taking.

My Game Plan

The day-to-day game plan stays the same. I am focused on the charts and individual stocks rather than on the indexes.

The Mag 7 outside of Alphabet (GOOGL) is likely to churn for a while, and the rotational action that showed up on Thursday is where the opportunities are. Apple cleared a hurdle last night, and that takes one more uncertainty off the table heading into the weekend.

Small-caps have good momentum, but we are just now starting to enter small-cap earnings season, so there will be plenty of landmines. Small-cap earnings are far less predictable than big-caps, so extra caution is needed to navigate the reports.

With many of the big-cap earnings reports in the rearview mirror, the important issue for the longer term is that analyst earnings projections are not revised lower. If we start to see some change, then it will be time to consider a less positive market view.

At the time of publication, Rev Shark was long GOOGL.