For whatever it’s worth, the bar to clear for corporate America when reporting season kicks off two weeks from now is the highest in nearly three years.

Bottom-up consensus expects aggregate index EPS growth of 9%. The last time expectations were that high, management was still benefiting from pandemic comps.

The figure below, from Goldman’s David Kostin, is useful.

As a quick reminder: America exited a short, shallow profit recession a year ago. Many top-down strategists expected a much deeper (and longer lasting) slump.

Cap-weighted index multiples are very elevated thanks to rich valuations for the handful of mega-cap AI beneficiaries that’ve shouldered the burden of a rally which pushed the S&P to more than 30 record highs in 2024. From here, analysts generally expect earnings growth (as opposed to multiple expansion) to do the heavy lifting.

By now, most readers probably know the narrative: The vast disparity between the figurative and literal fortunes of the titans on one hand and the rest of the market on the other is expected to narrow as the year goes on. Bulls are betting on a “catch up” scenario, while bears fret over a “catch down.”

Only one sector’s expected to post a meaningful decline in earnings for Q2: Materials. Both Info Tech and Comms Services are seen growing the bottom line by 17% led, of course, by the mega-caps. The “Magnificent 7” ex-Tesla should post EPS growth of 30% versus a mere 5% for the rest of the index.

On the top-line, the “AI 5” (Nvidia, Meta, Microsoft, Google and Amazon) are expected to report slower sales growth. Revenue for the group probably rose 17% YoY, down from 22% last quarter.

As Goldman’s Kostin noted, “sales growth for the median S&P 500 stock will be accelerating, albeit from a slower rate” over the next several quarters. That’s the “catch up” thesis.

Note the shaded grey area in the table: The sales growth disparity between the typical S&P 500 stock and the “AI 5” should narrow inside of 10ppt by Q4.

Kostin pointed out that the AI 5 current trade at 8x EV/sales versus just 3x for the median S&P 500 stock. “Companies trading above 8x EV/sales generated nearly the same reward as low multiple stocks when beating estimates but lagged the median Russell 3000 stock by 32ppt when they missed sales estimates,” he went on to note.

Reporting season kicks off on July 12. The mega-caps begin reporting in late-July. NVDA reports on August 23.