Well folks, the latest quarterly earnings reporting season is drawing to a close.

And with three-quarters of the S&P 500’s component companies having reported their results by now, we can safely say that stocks have once again exceeded expectations.

Now that the dust has mostly settled, there are a few insights – and a few surprises – to take note of, as we enter the back half of February.

So, in today’s issue of Inside TradeSmith, let’s dig a bit deeper into the data. We’ll see what we can learn from the latest batch of earnings winners and losers – and find the investment opportunities among S&P 500 sectors and stocks hiding behind the latest numbers.

Another Strong Quarter For Stock Earnings!

As of today, 370 of the S&P 500’s component companies have reported Q4 earnings. And of those 370 reporters, 74% have beaten earnings estimates with positive surprises.

Even better, the companies reporting positive earnings-per-share (EPS) surprises are beating forecasts by about 7% on average!

And overall, S&P profits are on track to grow by 13.4% year-over-year.

That marks the index’s fifth consecutive quarter of double-digit EPS growth. And as another upside for the S&P 500, positive earnings surprises are coming in across the majority of sectors:

Outside of the tech-heavy Communications Services and Information Technology sectors, the S&P sectors with the largest number of stocks beating expectations are…

• Consumer Staples, with 83% of reporting companies beating estimates,
• Health Care, with 82% of companies beating estimates,
• Energy, also with 82% beating estimates,
• And Industrials, with 77% of its reporting companies beating estimates.

And while both Technology and Communications stocks – including most of the “Magnificent 7” mega-caps – have underperformed the market recently… their earnings results have once again been, well, pretty magnificent!

94% of Communication Services stocks beat earnings expectations, coming in an average of 7% above analyst forecasts. And 92% of Information Technology stocks beat expectations, by an average of 8%.

This quarter, however, these high-performing stocks haven’t seen much positive price movement to go along with these positive earnings surprises. And that has a lot to do with their sky-high valuations.

Consider that the Technology sector trades at 24.3 times its expected EPS over the next 12 months… compared to the S&P 500 overall, trading at 21 times its expected EPS.

On the other hand, even if tech stock prices aren’t higher across the board, tech profit margins are.

This is a key earnings metric, and one I pay close attention to during earnings season.

That’s because companies that can consistently boost their profit margins have pricing power. And those companies can leverage larger bottom-line profit growth for every extra dollar of revenue earned.

As of Q4 2025, net profit margins for S&P 500 companies are at all-time highs, and for many sectors they’re still rising…

Technology sector profit margins are up to 29%, compared to 26.8% margins last year. And the Financials, Communications, Industrials, and Materials sectors have all seen their year-over-year margins increase as well.

Meanwhile, Utilities and Energy stocks saw their profit margins hold steady, while margins slipped a bit for stocks in the Real Estate, Consumer Staples, Health Care and Consumer Discretionary sectors.

Broadly, this is a good sign for stocks. And for another bullish signal, just look outside of the S&P 500. Profit growth for the small cap Russell 2000 Index is tracking at a fantastic 69% – five times faster than S&P 500 EPS growth last quarter!

Find New Opportunities In These Thriving Sectors

While most investors will pay close attention to EPS and profit growth, I find myself looking to a less popular earnings metric this quarter: The percentage of revenue earned outside of the United States.

Due to the weakening of the dollar, I expect more internationally oriented sectors and stocks to beat EPS estimates and grow profit margins.

And so far, that’s precisely the case: S&P 500 companies with more than half of their revenue earned outside the U.S. grew earnings 18.5% last quarter.

Meanwhile, more domestic oriented companies (earning more than 50% of their revenue in the U.S.) posted quarterly growth of just 10%!

That’s a big difference, and as long as the U.S. dollar remains weak, it’s a metric I’ll be paying close attention to.

The S&P 500 sectors with the most revenues earned internationally are shown at right in the graph below, in light blue:

The list of internationally profitable sectors include Technology (57% of revenues from abroad) and Communications (50%), of course, but also the Materials (52%), Consumer Staples (40%), Energy (38%), and Industrials (35%) sectors as well.

The common thread that runs through all these results, for large- small-cap stocks alike, are that these sectors are doing quite well, despite the recent market weakness:

• Industrials,
• Materials,
• Energy,
• Consumer Staples,
• And even Technology, are all seeing upward growth across several metrics.

Mike Burnick’s Bottom Line: The Industrials, Materials, Energy, and Consumer Staples sectors have been outperforming the stock market recently – but even as its most famous stocks fall behind, the Technology sector is doing well, too.

For my money, all of these sectors look like a great place to prospect for winning opportunities, especially among small caps. When using any of the Screeners we’ve developed in prior Inside TradeSmith issues, I’d focus in on these stocks with the Sectors filter.

Good investing,

Mike Burnick
Senior Analyst, TradeSmith