S&P 500 Earnings Seen Up 29.6% as Q3 Reporting Season Begins

A profit boom that keeps beating its own forecasts

Wall Street starts third-quarter reporting season expecting something it rarely gets outside a recovery from recession: a third straight quarter of S&P 500 earnings growth above 25%. As of October 9, FactSet put the blended year-over-year growth estimate for the quarter at 29.6%, up from 26.7% on June 3012. Revenue is expected to rise 12.4%, compared with the 10.9% analysts projected at the start of the quarter12. If those numbers hold, it would be the eighth consecutive quarter of double-digit earnings growth and the third straight quarter of revenue growth above 10%12.

The direction of the estimates matters more than their size. Analysts usually trim their numbers as a quarter goes on. Over the past five years, third-quarter-style revisions have cut estimates by an average of 2.2% during the quarter. This time the bottom-up EPS estimate rose 1.4% between June 30 and September 3011. Corporate guidance has been just as unusual. Seventy-two S&P 500 companies issued positive EPS guidance for the quarter, the most since FactSet began tracking the figure in 2006 and well above the previous record of 65 set in Q2 202112. That guidance is lopsided, though: 44 of those 72 companies are in information technology13.

The early reports fit the pattern. Of the 19 index members that had reported by October 9, 84% beat the mean EPS estimate, and in aggregate they came in 4.9% above expectations12. FactSet's own history suggests the headline figure will keep rising. Over the past five years, positive surprises have lifted the quarterly growth rate by an average of 6.4 percentage points between quarter-end and the end of reporting season, which would put Q3 growth at about 35.6%12.

The forecasts differ, and the headline number needs a footnote

Estimates for the quarter vary somewhat by provider. Goldman Sachs pegs expected EPS growth nearer 27%, against FactSet's 29.5%18. Another tally puts it around 31%28. Each of these numbers clears the 25% threshold, so the disagreement is about how big the boom is, not whether it exists.

The bigger interpretive problem is the second quarter. FactSet's August update showed Q2 growth running at 50.4%, the highest since Q2 202120. But Barclays calculated that excluding one-time items, Q2 EPS growth was 29.3% on sales growth of 13.3%1. Another analysis put the core figure at 33%, or 50% including other income18. One commentary argues that part of the AI-driven earnings surge reflects investment marks on private-company stakes, and asks what remains once those gains stop contributing at the same pace14. This reading treats the core growth rate of roughly 30% as the meaningful number. The 50% headline was partly accounting noise.

Margins are the other key detail. With revenue expected to grow about 12% and earnings about 30%, margin expansion is doing much of the work14. FactSet projects a Q3 net profit margin of 15.0%. That would be down from 17.0% in Q2 but well above both the 13.0% of a year ago and the five-year average of 12.6%12.

Two chipmakers and an oil shock

Coverage agrees that technology drives the boom. It disagrees on how narrow that leadership is.

On the concentration side, FactSet data cited by CNBC shows estimated EPS growth for the tech sector rising to 65% from 57% at the end of June, helped by upward revisions for Nvidia and Micron21. An analysis of Goldman Sachs and FactSet estimates found that those two chipmakers alone should account for more than a third of the index's Q3 EPS growth, more than the bottom 490 companies combined25. Separately, Goldman's chief U.S. equity strategist Ben Snider estimates that AI infrastructure spending drives about half of all S&P 500 earnings growth in 20262. The scale of the chip numbers explains why. Nvidia's latest quarter brought in $96.2 billion in revenue, up 106%, and the company guided to about $108 billion for the current quarter2.

On the broadening side, Russell Investments projects that the other 493 index members will grow earnings 27% year over year, faster than the roughly 20% expected from the Magnificent Seven21. Ed Yardeni expects mid-cap operating earnings to rise 19% in 2026 and small-cap earnings 21%21.

Both claims can be true. The Magnificent Seven are not the same group as the AI hardware suppliers, and Micron in particular sits outside that club. Energy is also lifting the broader numbers. With hostilities involving Iran restricting tanker traffic through the Strait of Hormuz, higher oil prices are pushing energy to the top of the sector growth rankings17. Energy profits are expected to rise roughly 115%28. So a broader boom is real, but much of it rests on two narrow drivers: AI capital spending and a geopolitical oil shock. Neither one reflects a broad-based economic cycle.

There is also clear weakness beneath the index. Eight sectors have seen bottom-up EPS estimates cut since June 30, led by materials at -10.2%, consumer staples at -4% and health care at -3.3%21.

Price targets follow earnings, not multiples

Strategists have been raising their year-end S&P 500 targets, and they are mostly doing it by raising earnings estimates rather than valuation multiples. Barclays lifted its 2026 target to 7,950 from 7,800, raised its 2026 EPS forecast to $365 from $337, and said earnings did "most of the heavy lifting" while its multiples stayed "deliberately conservative"15. HSBC moved to 8,100 from 7,650 on a $360 EPS forecast and 33% growth, though strategist Nicole Inui warned that multiple expansion may be hard to achieve4. Goldman raised its target to 8,000 from 7,6002. UBS's wealth management arm is the most bullish, forecasting 8,400 by June 202721.

Bank of America remains at the cautious end. It raised its year-end target to 7,400 from 7,100 and set a 12-month target of 7,800, while warning that current multiples assume lower inflation than the economy is likely to deliver3. The wider range of Street targets runs from BofA's 7,100 low to a cluster at 8,000 that includes J.P. Morgan, Deutsche Bank, Goldman and Morgan Stanley9. The index closed at a record 7,818.93 on October 625. That puts it close to the consensus targets with less than three months left in the year. For the most optimistic forecasts to come true, this earnings season has to deliver.

Why a compressed multiple is the real story

The S&P 500 has hit records even as its valuation has fallen. The forward 12-month P/E is 19.1, below its five-year average of 19.8 and down from 20.4 at the end of June12. Fidelity's Jurrien Timmer notes that the trailing P/E is down 10% year over year and argues that this is not a bubble24.

The cause is bond yields. The 10-year Treasury yield recently reached a 24-year high above 5.36%, and core PCE inflation was 3% in August21. Timmer describes rising yields and booming earnings as forces holding equities "in a vice," with real yields near 2.91% competing for capital23. Barclays found that in the second quarter, markets punished earnings misses much more than they rewarded beats, which it linked to the higher bar set by rising yields1. Bank of America still finds the index expensive on 17 of 20 valuation measures21.

Breadth is the clearest warning sign. Morgan Stanley says only about 20% of stocks were trading above their 50-day moving average at the end of September, down from 70% in midsummer21. Nearly 38% of S&P 500 members are at least 20% below their 52-week highs21.

The 2027 cliff

The key question is what happens after this quarter. Analysts expect 2026 earnings growth of about 33%. For 2027, FactSet's September projections called for growth of 15.4%, with Q2 2027 growth slowing to just 1.7% as the comparisons get much harder1213. Fifteen percent would still be strong by historical standards26. Even so, the market will have to adjust to that slowdown while investment-grade bonds pay more than 5%.

Here is the bottom line. The earnings boom is real, and estimates are being revised in a direction the market has rarely seen. But record index levels are coming from earnings growth outrunning a shrinking multiple, not from investors getting more confident. Bulls need this quarter to beat expectations again and need hyperscalers to confirm their 2027 spending plans2. If either one disappoints, the protection that rising earnings have given against high yields could shrink quickly.