A lot of companies have been able to post earnings beats this season, mainly because expectations were so low. But State Street Global Advisors U.S. SPDR Business Chief Investment Strategist Michael Arone thinks the second quarter may be a bottom in this earnings cycle. Arone explains to Yahoo Finance Live how earnings from tech and financial companies, for example, could be fairly strong, saying "technology companies are going to grow their earnings year-over-year by over 9%."

Video Transcript

JULIE HYMAN: Now, earnings season is indeed in full swing with over half of the companies on the S&P 500 having reported results so far. 80% have seen earnings beats. That's according to FactSet. And Michael Arone is still with the State Street Global Advisors US SPDR Business chief investment strategist.

Mike, you mentioned earlier-- you think that earnings are bottoming, or earnings growth, or in this case, declines are as bad as they're going to get. Is that-- walk us through that.

MICHAEL ARONE: So potentially, I do think this could be the bottom in the earnings cycle. So the fourth quarter, first quarter, and second quarter are all difficult. We've had sequential earnings per share growth that's been negative. And we're forecasted over the next couple of quarters to be positive.

Some positive signs in ones I know that we'll chat about is around technology. They had five consecutive quarters of very disappointing earnings. And now technology companies are going to grow their earnings year over year by more than 9%. So we know that they make up such a big portion of the indexes. That's going to be a positive contributor.

And for all of the anxiety around financials, they continue to surprise on the upside. So financials are going to grow their earnings year over year by more than 8%.

Now, I agree with most market observers that those earnings are likely to come under pressure due to regulatory response to the challenges in the March, April time frame due to the fact that they're going to have to increase interest on demand deposits and the like. But overall, financials and technology, two huge sectors of the market, are growing at 8% and 9% earnings.

And that's not just that. For technology, the next several quarters are supposed to gain momentum and do even better. And that's going to be a key contributor for the market. They've already had five bad quarters. We're looking forward. And they're actually going to do quite well, it looks like.

DIANE KING HALL: So the focus is forward, especially that-- so one company that we've been watching is AMD. They put out their results. They got an upgrade off the back. The Citi upgraded AMD after its earnings. Revenue did decline, but it's shrugging off any backward-thinking earnings beats.

But again, it was that low bar thing, especially when you compare it-- I mean, the $0.58 a share beat by $0.01-- down from last year in terms of earnings. But again, it's that forward thinking. Is it-- in the tech sector, is the focus just all about AI?

MICHAEL ARONE: I think AI is a big component of it. And I certainly do think that-- as you look at AMD, part of their announcement today was an AI component-- that they're going to make an AI chip for China that meets all of the regulatory requirements and things. And so the stock could be getting a little bit of a bump due to that.

AI is going to be in this phase where it's a bit of everyone's going to get a premium. Everyone's talking about it. Campbell's Soup is talking about AI. So it's going to get some bump as a result of that. And I think that the winners and losers will be more determined in the next 18 months or so from that standpoint.

I think the key here is that expectations for earnings got to such a low point. Everybody was expecting recession in the first half of the year, and it hasn't materialized. And as a result, all of these companies are easily surpassing very low expectations. And that's what I think is really spurring the rally for the markets.

JULIE HYMAN: Mike, you sound pretty bullish.

MICHAEL ARONE: I am. It's interesting, Julie. I've had this opinion since last August. And I was a little early. And it's this notion that the markets are not the economy and vice versa. So I do expect that as a result of all the rate hikes that the economy will slow. Earnings will continue to be sluggish for a little bit. But I think we're hitting the bottom.

And ultimately, that will find its way into the consumer and perhaps the labor market. And we're starting to see maybe the rate of growth in the labor market begin to slow. All that says as that process unfolds, as we're chatting about, investors will look 9 to 12 months ahead. And I think they'll-- excuse me, I think they'll price in what will be a recovery from that perspective.

I think one of the things that's really interesting here is that the Fed, in some ways, has engineered a soft landing. The economy is growing. Inflation has fallen dramatically. The labor market is really strong. Earnings are bottoming. The stock market's up. Housing's recovery. I'm just more fearful that they're not going to accept that victory. They're going to snatch defeat from the jaws of victory and keep going. I think that's the biggest risk of the market.

DIANE KING HALL: Meaning in September, the potential for what happens in September. And to your point, I believe it was B of A who dropped their call for-- have to double-check that with the--

JULIE HYMAN: Yeah, it was Bank of America. They're not expecting a recession any longer.

DIANE KING HALL: Yeah.

MICHAEL ARONE: And the more people that drop this call, the more nervous that I get. So everyone was expecting a recession in the first half, and now they're bailing on that. And similarly, when Julie and I-- we were chatting earlier around this notion of complacency.

The bears are throwing in the towel. The FOMO is coming, the fear of missing out. When this starts to happen, I tend to get a little bit more nervous in a seasonally weak period of time for markets. So it wouldn't surprise me if we have a bit of a correction in the August, September, October time frame.

But net-net, I have some really good news-- and I'll be quick with this one-- is that when the S&P is up 10% or more at this time of year and in the halfway point or a little bit longer, there's only been three times where it hasn't accelerated that momentum. Now, those times have been really bad. So hopefully, it's not, so 1987, 1929-- that was really bad too-- and World War II.

So typically, if we're up this much at this point of the year, markets build on that momentum into year end. So you're saying, am I bullish? Yeah, actually I am bullish. And I think that this will continue for at least a little while longer. The Fed and the economy are the wild cards.

JULIE HYMAN: All right. Michael, thank you so much. Good to see you, Michael Arone of State Street Global Advisors US SPDR Business chief investment strategist. Great to see you. Thanks so much for coming in.

MICHAEL ARONE: No, my pleasure. Thank you.