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Strong corporate earnings boost market confidence

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AI-driven companies lead market gains

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Short-term volatility expected, but long-term outlook

positive

By Saqib Iqbal Ahmed

NEW YORK, July 31 (Reuters) - With more than half of

second quarter earnings reported and stocks near record highs,

company results have reassured investors about the artificial

intelligence trade that has energized Wall Street, even if

tariff worries curtailed buying.

With results in from 297 of the S&P 500 companies as of

Thursday, year-on-year earnings growth for the second quarter is

now estimated at 9.8%, up from 5.8% estimated growth on July 1,

according to LSEG data.

Next week investors will get a peek at earnings from Dow

Jones Industrial Average constituents Disney ( DIS ),

McDonald's and Caterpillar ( CAT ), for a look at the

broader economy. Strong profit reports for these companies could

propel the Dow, trading just shy of its December record high, to

a fresh peak.

Some 81% of the companies have beaten analyst expectations

on earnings, above the 76% average for the past four quarters.

"The earnings season has been unambiguously better than

expected," Art Hogan, chief market strategist at B. Riley Wealth

in Boston, said.

The strength of corporate earnings is particularly

reassuring for investors after the pummeling sentiment took in

the prior quarter due to the twin threats of tariffs and worries

over flagging economic growth.

"The first quarter was a bit more mixed and you had some

questionable economic data ... which I think gave the market

some pause," said Tim Ghriskey, senior portfolio strategist at

Ingalls & Snyder in New York.

"But the second quarter seems to have just been a

turnaround," Ghriskey said.

The strength of results for names linked to the artificial

intelligence trade - the investment thesis that AI will be a

transformative force, driving a significant portion of future

economic growth and company profits - is particularly

heartening, investors and analysts said.

"Overall it has been mega caps, growth/technology/AI that is

driving a lot of the results," Ghriskey said.

"This is where we want to be exposed in terms of companies

... we're at maximum equity exposures and we're comfortable

there."

Having boosted the market for several quarters, the trade

ran into rough waters at the start of the year as the emergence

of Chinese-founded artificial intelligence startup DeepSeek

rattled investors, stoking concerns over heightened competition

that could disrupt the dominance of established tech giants at

the heart of the AI trade, including Nvidia.

Strong results from Microsoft ( MSFT ) and Meta Platforms ( META )

reassured investors that massive bets on AI are paying off.

Worries over AI demand appear overblown, Macro Hive research

analyst Viresh Kanabar said.

The trade related tumult earlier this year prompted many

investors to pare equity exposure, particularly to higher-risk

growth stocks.

Even after the market rebound - the S&P 500 is up about 6%

for the year and near a record high - institutional investors

have been slow to return to equities. Overall, investors' equity

positioning is still only modestly overweight, according to

Deutsche Bank estimates.

Strength in earnings from AI and technology names could draw

more investors and lift markets further in coming weeks,

analysts said.

"If you are trying to beat your benchmark and you were

underweight any of the AI names you have to chase them," B.

Riley Wealth's Hogan said.

After S&P 500's 2.2% gain in July, the seasonally volatile

months of August and September, markets might face some

short-term turbulence, Hogan said. Historically, August has

marked a pick-up in stock market gyrations that peaks in

October.

August kicked off with stocks selling off sharply on Friday

as new U.S. tariffs on dozens of trading partners and Amazon's ( AMZN )

unimpressive earnings weighed on sentiment, while a weaker

payrolls report added to risk aversion.

But any near-term market pullback should be seen as a buying

opportunity, especially in some of the mega-cap, technology

names, Hogan said.

With big AI names, Alphabet, Microsoft ( MSFT ), Nvidia, Meta

Platforms ( META ) and Amazon ( AMZN ), commanding about a quarter of the weight

in the S&P 500, the health of the AI trade bodes well for the

market at an index level, analysts said.

"We're not saying the weakness isn't there in other parts of

the economy," Kanabar said.

"We're just saying at the index level, the largest companies

dominate to such an extent (that) it doesn't matter to some at

the moment."