Scotiabank's Portfolio Strategy team says Q2 earnings for U.S. companies are beating estimates by a wide margin, but the bank's August chart book flags a shift underneath the numbers: the AI trade that has driven the market is increasingly funded by debt rather than free cash flow. That change, Scotiabank argues, could raise volatility even if it doesn't end the rally.
Earnings beat by a wide margin
Scotiabank's Portfolio Strategy team frames earnings as the reason the broader market has performed well this year. Q2 results have topped forecasts by 13% in aggregate. 85% of companies beat estimates, the strategists say.
The median beat came in at 5.9%. Top-line growth is running 13% year over year. EPS growth is up 38%, though the strategists caution the figure is boosted by Alphabet's unrealized gains on its stakes in Anthropic and SpaceX.
AI spending pushes leverage higher
Behind the earnings strength, Scotiabank sees the AI trade's financing changing. Consensus now calls for MAG-7 capital spending to top $1 trillion over the next 12 months, with free cash flow rolling over as that spending surges. Separately, once hidden off-balance-sheet obligations are included, the AI basket's net debt against forward EBITDA has climbed to 2x.
U.S. tech thrived for 15 years on an asset-light, no-debt model, but Scotiabank's team says that model is morphing. According to Scotiabank's strategists: "could lead to higher volatility (but not necessarily the end of the trade)".
Overweight stance holds, for now
Scotiabank stays slightly overweight U.S. tech on beats and positive revisions. Tech leads S&P 500 forward EPS revisions at +18% over three months. Still, the bank's strategists note the leverage is real and growing, and at some point it will demand real returns on AI spending.
Source: Investinglive RSS Breaking News Feed
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