News & Insights

Epic Earnings Season for U.S. Large Cap Companies

While the media focuses on geopolitics and market uncertainty, earnings expectations have built on blockbuster Q1 results. Despite the tremendous growth, market participants have remained levelheaded, if not skeptical, with much written about the fundamental risks to earnings during this aggressive deployment of artificial intelligence.

S&P 500 earnings are expected to grow an astounding 45% year-over-year (YoY), following on last quarter, which grew an equally impressive 27% YoY. These quarters account for the highest growth rates since the fourth quarter of 2021. The second quarter earnings season is still developing, but so far, 86% of companies are beating EPS estimates, well above the historical average. When grading the quality of earnings, a significant portion of the EPS increase is due to one-time gains reported by Alphabet (Google), Microsoft and Amazon. These gains came primarily from large valuation increases in portfolio holdings, notably Anthropic, combined with tax benefits from the One Big Beautiful Bill Act (OBBBA). Removing these non-operating profits, earnings growth was still up 20% in the first quarter and over 26% in the second quarter to date.

Revenue growth has also been strong, with Q1 rising 12% YoY and Q2 up 14% so far, the strongest pace since 2022. In the first quarter, 85% of companies beat earnings and 81% beat on revenue. Together, these results represent the highest beat for companies since the pandemic, and the second-best period in over two decades! The second quarter’s earnings season is shaping up similarly, with 86% beating on EPS and 77% on revenue. Profit margins are also up significantly based on strong leadership from infotech and comm services, but some sectors are still struggling to improve, notably health care and real estate. Guidance has improved but CapEx growth remains concentrated among the large technology firms.

Earnings broadened out in the first quarter, a trend expected to continue for the next two quarters with growth estimates for Q3 and Q4 now running at 27% and 25%, respectively. Full-year earnings growth is now forecast at 29% for 2026 and 14% for 2027. While higher oil prices are weighing on the economy, strong productivity, innovation and tax incentives are boosting U.S. companies.

Best EPS & Sales Beat Rate Since 2021 (% of Companies that Beat on Both EPS and Sales

Source: BofA Global Research

S&P 500 Calendar Year Bottom-Up EPS Actuals and Estimates, 2016–2027

Source: Goldman Sachs Investment Research

Private Credit is Facing a Liquidity Test, Not a Loan Loss Fiasco

While public markets focus on earnings, rising redemption pressures are testing the previously rapidly growing private credit market, which hasn’t operated in today’s rate and lending environment. Redemption requests from nervous investors in evergreen funds have stacked up amid projections of increasing defaults, primarily in software companies potentially affected by AI rollout. This collision of sentiment and fund structure appears to have led to an over-reaction from investors regarding the outlook of the funds’ assets.

Private credit has grown rapidly over the past decade, now exceeding $2 trillion globally. Part of this growth has come from retail investors accessing the market through business development corporations (BDCs) which are structured for retail accessibility, low minimums ($10,000 vs. $5 million for traditional private credit funds) and easy tax reporting (1099 vs. K-1).

BDCs democratized access to an asset class previously reserved for institutions, however, these investors are less accustomed to extended illiquidity and more sensitive to volatility, and now they’re pulling back. Redemption requests have risen sharply, in some cases reaching 20% of fund assets against a standard 5% quarterly limit. This dynamic can be self-reinforcing: rising redemption demand drives further concern, resulting in even more redemptions.

The interest rate cycle has played a key role in the rise and fall of this sector, exacerbated by the onset of AI. Private equity aggressively bid up company valuations in 2021, when a massive stimulus, 0% interest rates, easy monetary policy and a post-covid recovery were in sight. However, skyrocketing inflation the following year forced the Federal Reserve to raise rates aggressively. These PE-backed companies, leveraged when the fed funds rate was near zero, were now operating in a ‘higher for longer’ borrowing environment. This raised costs for the heavily weighted software sector of the portfolios in ways managers did not anticipate when the deals were structured. Now, as these debts mature, portfolio companies face a triple pressure: structural margin compression from AI-enabled competitors, elevated debt service costs from higher rates and the need for increased capital spending. Many of these portfolio companies’ annual run rates (ARR) have deteriorated from double-digit to single-digit growth, while their debts are growing faster than anticipated due to higher rates.

The underlying loan structures remain conservative on paper for much of this business. Most loans are first lien and low leverage, meaning significant impairments would need to materialize before holders faced real losses. Portfolio metrics can obscure the condition of funds because lenders frequently restructure troubled loans rather than formally declaring defaults. When companies struggle to service debt, lenders may revise covenants and extend maturity dates to avoid marking down assets, creating a gap between reported default rates and actual portfolio distress. This can cause managers to delay significantly marking down a company’s debt until material repayment stress becomes evident.

Meanwhile, publicly traded BDC vehicles are currently trading at greater than a 25% discount to net asset value, suggesting the market is pricing in material defaults and losses. While more markdowns are likely to come, the discount that public markets are pricing in is likely overly pessimistic.

The broader financial system is not exposed in a way that would amplify this into a systemic event. While banks do provide leverage and short-term funding to credit funds, they maintain a priority claim on assets should defaults occur, limiting their downside exposure even before first-lien holders of the debt. Although repricing and tighter capital allocations are likely as managers navigate redemption queues and rate-stressed portfolios, there is no evidence of a broader credit event.

Net Asset Value (NAV) vs. Price for Blue Owl Capital Corporation (in blue) and Fund Peers (in Purple and Aqua)

Source: CEF Advisors

U.S. Corporate Debt as a % of GDP

Source: Board of Governors of the Federal Reserve System

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This commentary is as of Aug. 6, 2026, for informational purposes only and is not investment advice, a solicitation, an offer to buy or sell, or a recommendation of any security to any person. Managers’ opinions, beliefs and/or thoughts are as of the date given and are subject to change without notice. The information presented in this commentary was obtained from sources and data considered to be reliable, but its accuracy and completeness is not guaranteed. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not indicators or guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification strategies do not ensure a profit and cannot protect against losses in a declining market. All indices are unmanaged, and investors cannot invest directly into an index. You should not assume that an investment in the securities or investment strategies identified was or will be profitable.

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