Third-quarter earnings results began rolling in this week, with market participants anticipating robust profit performance across the S&P 500. Analysts compiled by FactSet forecast approximately 30% year-over-year earnings growth for the index, representing an increase from the 26.7% projection issued on June 30th.
The technology sector, which comprises 40% of the S&P 500, is expected to lead profit expansion. Estimated earnings-per-share growth for the tech sector has risen to 65% from 57% on June 30th, bolstered partly by upward revisions for major chipmakers. Strong quarterly results from artificial intelligence-focused companies and semiconductor manufacturers have alleviated concerns about demand cycles peaking. Meta Platforms’ introduction of its Muse agent has sparked competitive efforts in AI-enabled consumer commerce.
Earnings strength is extending beyond the largest companies. The remaining 493 S&P 500 constituents are forecast to deliver 27% year-over-year gains compared to an expected 20% average for the Magnificent Seven stocks. Mid-cap and small-cap equities also demonstrated healthy outlooks, with S&P 400 MidCap operating earnings projected to rise 19% and S&P 600 SmallCap earnings forecast to increase 21% this year.
However, market breadth challenges persist beneath the surface. Approximately 38% of S&P 500 stocks were trading at least 20% below their 52-week highs as of late September. Additionally, eight sectors have experienced negative earnings estimate revisions since June 30th, with materials, consumer staples, and health care posting the largest declines. Rising bond yields, with the 10-year Treasury yield reaching above 5.36%, pose potential headwinds to high-yielding sectors including utilities and real estate.
For equities to conclude the year strongly, several conditions require fulfillment: major companies must exceed earnings expectations, bond yields must stabilize, and oil prices must moderate below $100 per barrel. Major bank earnings reports scheduled for October 13 are anticipated to provide critical insights into lending dynamics and capital markets activity under the current interest rate environment.
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