Q3 Earnings Season Begins as Investors Eye S&P 500 Profit Surge

Traders work at the New York Stock Exchange on Sept. 30, 2026.

NYSE

Third-quarter earnings season begins this week, with results expected to confirm market optimism for continued strong growth in S&P 500 profits.

The market closed at record highs Tuesday as investors maintained confidence that AI-driven capital spending—a key market and economic driver—will remain resilient despite rising bond yields. With supportive corporate guidance and stable bond market conditions, earnings could drive stocks toward a robust year-end performance.

Profit growth at the index level is projected to be exceptional. Analysts forecast nearly 30% year-over-year earnings growth for the S&P 500, according to FactSet consensus estimates, up from 26.7% as of June 30.

Technology remains the pivotal sector, representing 40% of the S&P 500. This concentration would typically raise concerns, but current profit projections are trending upward rather than downward. Sector EPS growth estimates have climbed to 65% from 57% on June 30, partly driven by positive revisions for Nvidia and Micron Technology, per FactSet data.

Strong results from AI chipmakers and major technology firms have helped ease concerns about the earnings cycle peaking. Micron’s impressive performance signals sustained demand for AI chips. Meanwhile, Meta Platforms’ introduction of its Muse agent has sparked competition to capitalize on AI-powered consumer commerce.

Importantly, earnings growth is expanding beyond the Magnificent Seven stocks. Those large-cap tech names are projected to achieve around 20% growth, while the remaining 493 S&P 500 components are forecast to deliver 27% year-over-year gains, according to Russell Investments.

Earnings momentum also appears healthy outside large-cap equities. S&P 400 MidCap operating earnings are projected to grow 19% in 2026, economist Ed Yardeni of Yardeni Research notes. Additionally, analysts project S&P 600 SmallCap earnings to rise 21% this year and 16% in 2027.

“Equities continue to respond to earnings performance,” Barclays strategists noted in a recent report. With S&P 500 profits expected to grow 30% this year, they added: “The period from 2025 to 2027 is poised to represent the strongest three-year span of earnings growth outside of recession recovery periods in recent decades.”

UBS also maintains a positive outlook. “Investors should maintain exposure to potential market upside,” said Ulrike Hoffmann-Burchardi, CIO Americas and Global Head of Equities at UBS Chief Investment Office. “Our forecast projects the S&P 500 reaching 8,400 by June of next year.”

Underlying Challenges Emerge

However, challenges persist outside top-tier technology and chip stocks. Market breadth continues to weaken significantly. Approximately 20% of stocks traded above their 50-day moving averages at the end of September, down from 70% during mid-summer, according to Morgan Stanley.

Beneath the surface of megacap dominance, numerous stocks remain mired in bear market territory. Of the 504 S&P 500 companies, nearly 38% were trading 20% or more below their 52-week peaks. Notable decliners include CoStar Group, AppLovin, Boston Scientific, Oracle, and Coinbase Global.

Sector-level performance varies considerably. While all S&P 500 sectors are expected to show growth, eight sectors have experienced downward revisions in bottom-up EPS estimates since June 30, with materials (-10.2%), consumer staples (-4%), and healthcare (-3.3%) leading the declines, according to FactSet.

Even with strong corporate profits, rising interest rates pose risks. The 10-year Treasury yield recently reached a 24-year high above 5.36%, up from 4.75% in August. While part of this increase reflects robust economic activity, it also incorporates persistent inflationary pressures. Core PCE deflator—the Federal Reserve’s preferred inflation measure—remained at 3% in August. Additional rate hikes may be necessary to bring inflation closer to the Fed’s 2% target, unless economic conditions deteriorate significantly.

Higher interest rates disproportionately affect rate-sensitive sectors including utilities, consumer staples, and real estate. Financial institutions may face pressure on fixed-income portfolio valuations, potentially leading to balance sheet losses.

To date, rate increases haven’t undermined AI-related investments or other earnings drivers. Barclays strategists contend the market could absorb even a full percentage point increase in rates. “With 30% earnings growth and real rates rising 100 basis points, earnings momentum retains the advantage,” they observed. “This understanding explains why equities have shown remarkable resilience.”

Investors will watch closely as major banks report next week, providing insight into how rising rates are affecting lending activity, merger and acquisition volumes, and initial public offering markets. JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo release earnings on October 13.

Earnings reports will also serve as a crucial test for current market valuations. Although the S&P 500’s forward price-to-earnings ratio has declined to approximately 19 times, Bank of America notes the index still appears overvalued against 17 of 20 key metrics, suggesting potential long-term returns averaging negative 3% annually over the next decade.

In terms of near-term positioning, BofA’s momentum and value models currently favor energy, technology, and communication services sectors.

Jefferies emphasizes sectors showing improving earnings fundamentals and macroeconomic tailwinds, identifying financials, healthcare, technology, and materials among the primary beneficiaries.

Multiple factors must align for equities to maintain upward momentum through year-end: major technology firms and banks must exceed Wall Street expectations; bond yields need to stabilize; and crude oil prices should decline, ideally falling below $100 per barrel amid developments involving Iran.

If these conditions materialize as anticipated, stocks should conclude the year with substantial gains.

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