Record Pace for Corporate Earnings Keeps Stocks Buoyant

With these potential hurdles coming into view, investors have been heartened by a standout earnings season in which the share of big U.S. companies beating profit expectations is on pace for a record. What’s more, companies are turning more of their sales into earnings, keeping profit margins at record highs.

“The earnings coming out have definitely helped alleviate concerns of investors that maybe earnings are not going to keep up with the pace of the stock market,” said

Gene Goldman,

chief investment officer at Cetera Financial. “They’ve kept up pace.”

While the bulk of earnings reports are in, investors this week will parse results from companies including

Tyson Foods Inc.,

eBay Inc.

and

Walt Disney Co.

Analysts now project that earnings from companies in the S&P 500 grew 90% in the second quarter from a year earlier, up from an estimate of 53% growth the day before the quarter’s April kickoff, according to FactSet.

The unusually high growth rate highlights the rocky period that companies endured in the second quarter of 2020, when the coronavirus pandemic constricted large portions of the economy. But quarterly profits are also expected to surpass their 2019 levels.

Rising share prices have kept stock valuations elevated. The S&P 500 traded Thursday at more than 21 times its projected earnings over the next 12 months, above a five-year average of 18.5.

With 83% of the market value of the S&P 500 having reported, the operating margin for the index in the second quarter is expected to come in at 13%—a hair below the record set in the first quarter, according to

Howard Silverblatt,

senior index analyst at S&P Dow Jones Indices.

At a time of increased attention to inflation, the results show that big U.S. companies have succeeded in growing their sales while managing their costs. It helps that many consumers have money to spend after government stimulus checks and spending cutbacks in categories like entertainment and travel boosted their accounts earlier in the pandemic.

“It’s the pricing power that a lot of these companies have right now,” said

Victoria Fernandez,

chief market strategist and portfolio manager at Crossmark Global Investments. “Because we have consumers that have been sitting basically on the sidelines of the economy, waiting for the economy to reopen, there is a tremendous pent-up demand there.”

McDonald’s Corp.

recently said that menu price increases of about 6% over the past year helped lift U.S. sales, and

Chipotle Mexican Grill Inc.

said it hadn’t received pushback from customers after raising prices by about 4% earlier this year. Both restaurant chains beat earnings expectations.

The strength of corporate earnings has raised the likely trajectory for stocks in some investors’ eyes. Analysts at

Goldman Sachs Group Inc.

last week cited higher-than-expected earnings and lower-than-expected interest rates as they raised their year-end price target for the S&P 500. They noted that most sectors are seeing profit margins expand from pre-pandemic levels.

But with costs rising and a threat of higher corporate taxes from Washington, many investors are questioning whether companies can continue to turn such high percentages of revenue into profits.

“It would be reasonable to expect that this could be a peak quarter for margins,” said

Rebecca Felton,

senior market strategist at RiverFront Investment Group. “With the increased number of mentions of inflation in these earnings calls as management teams are doing them, it has to come out in the bottom line at some point.”

Shares of

Colgate-Palmolive Co.

fell 4.8% on July 30 after the consumer-products company said it expects costs to chip away at its margins in the second half of the year.

Campbell Soup Co.

shares dropped 6.5% on June 9 after the soup maker’s chief executive said he expects higher costs to squeeze profit margins in the coming months.

Money managers are also training their focus on developments around the Delta variant, which is driving up coronavirus cases in the U.S. and dividing business leaders on the question of how to respond.

“Delta clearly is a big question mark on everything,” said

Qie Zhang,

investment director at Aberdeen Standard Investments. “If consumers are not confident in going out and spending their money, that’s going to be a big pressure on economic activity overall.”

Write to Karen Langley at karen.langley@wsj.com