Analysts now expect nearly 30% year-over-year earnings growth for the S&P 500 in the third quarter, up from a 26.7% forecast at the end of June. Profit growth is broadening beyond the Magnificent Seven, but rising bond yields and persistent inflation pose risks to the index's push to new highs.
Third-quarter earnings season starts this week, and consensus estimates compiled by FactSet point to nearly 30% year-over-year profit growth for the S&P 500, up from 26.7% projected on June 30. The market closed at record highs Tuesday as investors bet that AI capital spending can keep driving profits even as bond yields climb.
Tech remains the critical sector, accounting for 40% of the S&P 500. Estimated EPS growth for the sector has risen to 65% from 57% on June 30, partly on upward revisions for Nvidia and Micron Technology, according to FactSet. Micron delivered a strong quarter, easing concerns the AI chip cycle was topping out.
Growth broadens beyond the Mag-7
Crucially, the rally is not confined to megacaps. While the Magnificent Seven are expected to post average growth of 20%, the other 493 stocks in the index are forecast to deliver 27% year-over-year gains, according to Russell Investments. S&P 400 MidCap operating earnings should rise 19% in 2026, and S&P 600 SmallCap earnings are expected to climb 21% this year and 16% in 2027, according to Yardeni Research.
According to Barclays strategists: "Equities are still responding to earnings," the firm said in a note this week, adding that S&P 500 profits are on track to rise 30% this year.
Breadth problem beneath the surface
Still, the gains mask weakness elsewhere. Only about 20% of stocks traded above their 50-day moving average at the end of September, down from 70% in midsummer, according to Morgan Stanley. Nearly 38% of the 504 stocks in the S&P 500 are off 20% or more from their 52-week high, including CoStar Group, AppLovin, Boston Scientific, Oracle, and Coinbase Global, each down at least 50%.
Bond yields and inflation threaten the rally
Rising bond yields could still spoil the party. The 10-year Treasury yield hit a 24-year high above 5.36%, up from 4.75% in August, partly reflecting inflation pressure. Core PCE inflation, the Federal Reserve's preferred gauge, was 3% in August, above the Fed's 2% target. Earnings will also test the market's P/E ratio: the S&P 500's forward P/E has dropped to about 19 times, yet the index reads expensive on 17 of 20 valuation measures, according to Bank of America.
Investors should watch big banks reporting next week for signals on lending, M&A activity and the IPO pipeline, with JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo reporting October 13.
Source: US Top News and Analysis
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