KEY POINTS
- The Nasdaq Composite has gained six consecutive weeks, closing Friday at a record 26,247 after surging 4.5% last week on blowout AI earnings from Alphabet, Amazon, and Meta.
- S&P 500 blended Q1 earnings growth has jumped to 27.1% with 84% of companies beating estimates, the highest beat rate since Q2 2021, driven overwhelmingly by the Magnificent Seven.
- Traders should watch whether breadth expands beyond mega-cap tech or whether the Dow's 0.2% weekly gain signals dangerous narrowing ahead of Nvidia's May 20 report.
The Nasdaq Composite closed Friday at 26,247, up 1.7% on the session and 4.5% for the week, completing its sixth consecutive weekly advance and marking the longest winning streak for the tech-heavy index since late 2024. The S&P 500 gained 2.3% for the week, closing at a record 7,399. The Dow, by contrast, managed just 0.2%, finishing at 49,609 in what has become a persistent and widening divergence.
The gap between the Nasdaq and the Dow has reached levels not seen since the early stages of the pandemic recovery in 2020, and the explanation is almost entirely concentrated in artificial intelligence. The Magnificent Seven stocks — Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla — are growing earnings at a pace that makes the rest of the index look pedestrian. According to FactSet's May 8 earnings update, the S&P 500's blended Q1 earnings growth rate has surged to 27.1%, up from roughly 15% just two weeks earlier. The jump was almost entirely attributable to three companies: Alphabet, Amazon, and Meta, whose collective positive earnings surprises added more than 10 percentage points to the index-level growth rate.
The Beat Rate Tells the Story
The numbers beneath the headline are equally striking. Of S&P 500 companies that have reported first-quarter results, 84% have beaten earnings-per-share estimates. If that rate holds through the end of reporting season, it will mark the highest percentage of positive surprises since the second quarter of 2021, when the post-pandemic reopening was generating once-in-a-generation revenue comparisons. The aggregate magnitude of the beat is also elevated: companies are exceeding estimates by an average of 9.2%, well above the five-year average of 7.4%.
But the distribution of those beats is wildly uneven. Technology and communication services are carrying the weight. Industrials, materials, and consumer discretionary are seeing more modest beats or outright misses. Caterpillar dropped 3.9% last Thursday. Nike has lost 18% since its March report. The consumer-facing economy is absorbing the full impact of $4.50 gasoline, and the earnings numbers reflect it.
The hyperscaler capital expenditure cycle remains the single most powerful tailwind in the market. Amazon, Alphabet, Microsoft, and Meta Platforms plan to spend nearly $700 billion combined on AI infrastructure in 2026. That spending flows directly to semiconductor companies, server manufacturers, power suppliers, and data center operators. Constellation Energy, which reports this morning, has become a proxy for AI power demand after its $26 billion acquisition of Calpine's natural gas fleet, positioning it as the largest clean energy producer in the country by capacity.
Where the Divergence Gets Dangerous
The risk for bulls is that a rally this narrow cannot sustain itself indefinitely. The equal-weight S&P 500 has underperformed its market-cap-weighted counterpart by more than 600 basis points year-to-date. Small caps, as measured by the Russell 2000, gained just 0.76% last week, lagging the Nasdaq by nearly six-to-one. That kind of concentration historically precedes either a broadening event — where lagging sectors catch up — or a correction in which the leaders give back gains as momentum fades.
RBC Capital Markets raised its year-end S&P 500 target last week, citing the durability of AI-driven earnings growth. But even the bulls acknowledge that the valuation premium on mega-cap tech is stretched. Nvidia trades at 38 times forward earnings ahead of its May 20 report. Microsoft sits at 34 times. These are not bubble-era multiples, but they leave no room for disappointment.
What Comes Next
Monday's earnings slate offers a cross-section of the market's fault lines. Constellation Energy will test the AI power demand thesis. Circle Internet Group, reporting its first quarterly numbers as a public company, gives traders a read on stablecoin economics and crypto infrastructure revenue. Hims & Hers, reporting after the close with consensus expecting just $0.03 per share — down from $0.20 a year ago — will show whether the consumer health trade has any fight left.
The real question this week is whether oil above $100 can coexist with equity markets at all-time highs. The last time Brent sustained triple digits for more than two weeks in 2026, the S&P 500 pulled back 4.8% in five sessions. Traders should keep one eye on the Strait of Hormuz negotiations and the other on the Senate floor, where Warsh's confirmation and his first public remarks will set the tone for monetary policy expectations through the summer. The Nasdaq's 26,000 level, which marked the breakout point two weeks ago, is the first line of defense if selling pressure accelerates.
