The Q1 earnings season is in full swing. A lot of the growth hinges on the hyperscalers, which do not only themselves contribute to earnings growth but are also driving the earnings growth in other sectors, such as semis, industrials and utilities. Wolf von Rotberg, equities strategist at J. Safra Sarasin Sustainable Asset Management, shares his insights.
After four out of five hyperscalers have reported this week, capex strength has been confirmed. Total 2026 investment spending of the group has risen to USD765bn, from less than USD650bn before. The AI supply chain build out is thus set to continue in the months to come. The outlook is further supported by AI adoption data. Hyperscalers have reported decent growth in their cloud businesses on the one hand, and surveys are showing that an increasing number of businesses is paying for AI usage on the other hand. Structural support for the AI theme thus remains strong.
51% of S&P 500 companies have reported so far
The US earnings season is in full swing and on track to produce one of the strongest year-over-year EPS growth numbers over recent years. After 51% of S&P 500 companies have reported their Q1 results, the blended EPS growth number (actual & consensus) is tracking at 19.3%, which would be the strongest earnings growth number since the beginning of 2022.
Given that growth has steadily been rising as strong reports came in, with more than 70% of companies beating expectations, an EPS growth rate above 20% by the end of the season is within reach. Remarkably, sales growth has not seen the same kind of acceleration and is also distinctly lower than it was after the end of the pandemic in 2022.
Margin expansion driving earnings growth
The gap between earnings and sales growth can be explained by expanding margins, which have reached new record highs. Reported data show a net income margin of 14% in Q1 (ex-financials and energy), which is another increase from the previous quarter and is well above the 5-year average of 12.4%. One may think that this is mostly down to tech and semis, which have seen margins surge due to their enormous pricing power.
Yet this is only partly true. Even though tech has led the margin expansion in the S&P 500 over recent months, it has by no means been the only sector which has seen margins rise. Excluding tech, financials and commodity sectors from the S&P 500, index margins have still been on a steadily rising trajectory.
18 out of 22 industries have margins above respective five-year averages
Going one level deeper provides some interesting insights. Among 22 level 2 GICS industry groups shown below, 18 have margins above their respective five-year averages. Semis clearly stand out. At 46%, the sector’s net income margin is 13%pts above its five-year average. Remarkably, software margins are the second strongest against their own five-year average. The sector is also tracking at a fairly solid 15% yoy EPS growth rate in Q1.
We think this is important as it may help to alleviate some of the fears over private credit. If software faces a terminal value issue which only arrives in several quarters or years, credit investors should be less concerned as several quarters of decent earnings should help to substantially reduce risks before the day of reckoning arrives.
Hyperscalers upgrade capex guidance significantly
What’s clear from the Q1 numbers is that the AI build out will continue at an unabated pace. Four out of five hyperscalers have reported this week. Their capex spending has singlehandedly driven the rally in the semis space over the past years and weeks. It has also been a key driver behind spending on other equipment, supporting industrials, utilities and other sectors.
All four hyperscalers that have reported this week have upgraded their spending plans, lifting 2026 total capex to USD765bn, from less than USD650bn just a few months ago. We would thus remain optimistic that demand across the AI supply chain will hold up this year.
Rising AI adoption bodes well for AI trade
Eventually, what matters most is obviously final demand for AI. Yet on this front as well, recent data should dash fears that adoption is slowing. On the one hand, hyperscalers reported solid cloud revenue growth in Q1, which is the business where AI revenues accumulate. On the other hand, recent survey data show that adoption rates are accelerating again, after a period of moderation in 2025. Surveys are showing for the first time that more than 50% of US companies are paying for AI usage, with larger companies’ adoption rates above 60%.
The recent acceleration has been skewed heavily towards Anthropic (Claude), while OpenAI (ChatGPT) adoption has stagnated. These numbers have briefly weighed on publicly-traded names closely associated with OpenAI. Yet it seems unlikely to have a lasting impact on the market as compute capacity is in short supply and will likely remain so for the time being. If OpenAI were to fall behind, we would expect demand from other enablers to compensate for the shortfall.
The AI trade should have legs
Bottom-line, the Q1 season has so far confirmed the strong earnings picture that consensus data had started to show going into the season. Continued hyperscaler spending remains crucial for tech margins and earnings growth in the AI supply chain. Even more, it has become a crucial element supporting GDP growth. Eventually, this requires the consumer (private and professional) to pick up the tab.
Yet recent data are encouraging. Adoption rates are rising and companies are increasingly paying for AI products. While the evidence on productivity gains remains thin, AI penetration is moving into the right direction and keeps the structural case for the ecosystem intact.
