By Spencer Jakab

Do we have an all-clear? The S&P 500 and Nasdaq composite indexes fell every single session last week, mainly on AI worries, but they appear set to start a holiday-shortened one with gains. Oil prices are higher too overnight after more skirmishing in the Middle East. The U.S. and

Iran have agreed to resume peace talks. One crucial sticking point is Iran's insistence that its deal gives it authority over the vital Strait of Hormuz.

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Hall of Fame numbers?

The second quarter ends tomorrow and big American companies knocked it out of the park. Their feat deserves an asterisk.

The first clue about how unusually profitable the quarter has been is that analysts raised their earnings-per-share forecasts for the S&P 500 by 3.4% since the end of March, according to FactSet analyst John Butters. Analysts typically lower them during the quarter, which helps most companies later report a positive "surprise." The average reduction has been 2.7% over the past 40 quarters.

And those raised forecasts follow the most-profitable quarter ever for the S&P 500, both in terms of net margin and dollars earned. Earnings grew the way they do during the recovery from a recession, not year six of an expansion.

Analysts expect slightly lower profit margins for the second quarter, but positive "surprises" should nudge them to a fresh record once companies report. Those Hall of Fame numbers owe a lot to performance enhancements.

A handful of companies — mainly Alphabet, Amazon and Nvidia — had their operating income boosted in the first quarter by an obscure accounting rule. Their stakes in unlisted AI companies such as Anthropic and OpenAI were marked up when those companies raised funds at higher valuations.

That made a normally minor item huge, according to University of Florida finance professor Baolian Wang. It was equal to about 12% of the first quarter's S&P 500 profits overall. But it's just a paper gain.

Wang's preliminary numbers call for an effect two to three times as great in the second quarter. The gains could be creating a "circular valuation loop," warns Wang.

Excellent earnings growth for publicly listed tech companies is stoking optimism about unlisted ones, sending their valuations higher. That then produces more accounting gains, and so on.

Instead of treating this as a one-off factor that could eventually go into reverse, analysts' bottom-up earnings estimates for the S&P 500 seem to assume the home runs will keep coming. Earnings-per-share growth is seen being higher than sales growth in 2026, 2027 and 2028.

For perspective, the first quarter's net profit margin of 14.8% was about twice the postwar average. Some of that has to do with the types of companies that dominate the market. Companies selling each other lots of AI gear but depreciating it slowly is another temporary accounting boost.

Profits don't look natural.

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Stocks I'm Watching

British American Tobacco : The tobacco giant and maker of Dunhill cigarettes saw its London-listed shares drop more than 1% after it announced plans to cut 5,500 jobs and outsource a further 3,500 roles.

Comcast : The company announced plans to split into two through a tax-free spin-off of NBCUniversal and Sky; shares jumped premarket.

Palantir Technologies : Shares of the data-analytics company edged up 2% premarket, further recovering from a multiday losing streak driven by fears about the sustainability of the artificial-intelligence rally. Other stocks tied to the AI trade, such as Nvidia Corp , Intel Corp and Micron Technology , also notched premarket gains.

Samsung Electronics , SK Hynix : Shares in the South Korean chip makers ended the day lower, but pared losses after they committed massive new investments in building chip production facilities in the country.

🔎 Verizon Communications : BT, a London-listed telecommunications operator, said it would form a joint venture with the U.S. telecommunications provider.

Ipsen : The French drugmaker said it agreed to buy U.S.-based clinical stage biopharmaceutical company Kartos Therapeutics to add to its pipeline of cancer medicines. Its shares rose.

One Big Chart

At some private-equity funds, the old saying about not counting your chickens before they hatch doesn't apply. They're collecting big fees on paper gains.

What I'm Reading

  • The trillion-dollar borrowing binge lifting the stock market to risky heights. (WSJ)
  • How a master of deception conned investors out of $50 million -- in his own words. (WSJ)
  • A $55 billion safety net? The federal government's tab to prop up American farms is rising. (WSJ)
  • A legal fight between two of the U.S.'s biggest rare-earths companies illustrates the stakes behind the breakneck effort to loosen China's hold on the sector. (WSJ)
  • The case for value over growth is building as the Magnificent Seven have started looking more ordinary. (Apollo)

Today in Markets History

📰 On this day in 1956, President Dwight D. Eisenhower, spurred on by memories of how easy it was for Allied troops to move along Germany's autobahns in 1945, and how difficult it had been for an army convoy to cross the U.S. in 1919, signed the Federal-Aid Highway Act. It created the Interstate Highway System.

Beyond the Newsroom

WSJ | Buy Side: Oura's newest wearable is a great alternative to watchlike fitness trackers.

About Me

Business and finance have fascinated me for a long time. Before writing this newsletter, I edited The Wall Street Journal's Heard on the Street team for a decade, wrote two investment books and managed a team of stock analysts at a global investment bank.

The Markets A.M. newsletter prepares you for the trading day ahead, with expert insight into the companies and industries set to move markets. Send your feedback to markets.am@wsj.com (if you're reading this in your inbox, you can just hit reply). For a recap of the day when the markets close, sign up for Markets P.M.