The US stock Q3 earnings season kicks off: Profit growth expected to approach 30%. Can this boost the S&P 500 to new highs?

According to Zhihui Finance APP, the third-quarter earnings season for U.S. stocks kicks off this week. As the earnings reports are released, the long-awaited event in the market is likely to come true: S&P 500 profits are expected to see another explosive growth.

On Tuesday, U.S. stocks closed at all-time highs, as investors bet that AI capital expenditures would not be derailed by rising bond yields. AI capital investment has become a major driving force for the U.S. market and economy. If key companies issue optimistic guidance, combined with a stabilizing bond market, it could propel U.S. stocks to a strong finish by year-end.

AI Engine at Full Speed: S&P 500 Earnings Growth Nears 30%

At the index level, profit growth is expected to be very strong. According to consensus forecasts compiled by FactSet, analysts expect S&P 500 companies’ third-quarter earnings to rise nearly 30% year-over-year, a forecast higher than 26.7% on June 30.

The technology sector remains crucial, accounting for 40% of the S&P 500’s weighting. If earnings expectations were to fall, it would usually spark concern, but the opposite is happening. FactSet points out that the tech sector’s expected EPS growth has risen from 57% on June 30 to 65% at present, partly due to upward revisions to earnings forecasts for Nvidia (NVDA.US) and Micron Technology (MU.US).

Analysts Raise Earnings Growth Forecasts

The strong performance of AI chipmakers and other large tech companies has eased concerns about the current cycle peaking. Micron delivered a robust financial report, sending a positive signal for broader AI chip demand. On the consumer side, Meta Platforms‘ launch of the Muse agent has fueled an arms race for AI-powered e-commerce.

More importantly, earnings growth is spreading beyond the “Magnificent Seven.” According to Russell Investments, these giants are expected to grow by an average of 20%, while the remaining 493 stocks in the S&P 500 are projected to increase earnings by 27% year-on-year.

Beyond large-caps, mid- and small-cap earnings growth also remains healthy. Ed Yardeni, head of Yardeni Research and economist, noted that the S&P 400 mid-cap index’s operating profits are expected to grow by 19% in 2026. He added that analysts forecast S&P 600 small-cap earnings to grow by 21% this year and another 16% in 2027.

Barclays strategists stated in a report this week: “The stock market still responds to corporate earnings.” They wrote that S&P 500 profits are expected to grow by 30% this year, adding: “2025–27 may become the fastest three-year period of earnings growth (excluding post-recession rebounds) in decades.”

UBS is also optimistic. Ulrich Hofmann-Burchardi, CIO for the Americas and Global Head of Equities at UBS Chief Investment Office, said in a report on Wednesday, “Investors should continue to position for market upside, and we expect the S&P 500 to reach 8,400 by June next year.”

Cracks Under Prosperity: Market Breadth Deteriorates, Bond Market Pressure Intervenes

However, stocks outside the “Magnificent Seven” and main chipmakers still require an earnings boost. Market breadth is worsening. According to Morgan Stanley, as of the end of September, only about 20% of stocks were trading above their 50-day moving average, down from 70% at the height of summer.

Aside from large-caps, many stocks are deep in bear territory. Of the S&P 500’s 504 constituents, nearly 38% are down 20% or more from their 52-week highs. Companies with at least a 50% drop include CoStar Group (CSGP.US), Applovin (APP.US), Boston Scientific (BSX.US), Oracle (ORCL.US), and Coinbase (COIN.US).

From an industry perspective, the outlook is not universally positive. Although all sectors of the S&P 500 are expected to achieve growth, FactSet data shows that since June 30, bottom-up EPS estimates have been lowered for eight sectors, with materials (-10.2%), consumer staples (-4%), and healthcare (-3.3%) leading the declines.

Even with strong index profits, rising bond yields could still upset the rally. The yield on the 10-year U.S. Treasury just broke through 5.36%, a 24-year high and up from 4.75% in August. Part of the yield’s rise reflects strong economic growth, but it also points to persistent inflationary pressures. The Fed’s preferred core PCE inflation measure was at 3% in August. If the economy avoids recession, several more rate hikes may be needed to bring inflation closer to the 2% target.

Rising rates put pressure on high-dividend sectors like utilities, staples, and real estate. Banks may also feel the strain due to fixed-income portfolios accumulating losses on their balance sheets.

Currently, rising rates have not been enough to undermine AI trades and other earnings growth drivers. Barclays strategists believe that even if rates rose by one percentage point, the market might remain unaffected. They stress: “If earnings grow 30% and real rates rise by 100 basis points, earnings growth (if not already priced in) still has the upper hand. The stock market knows this—that’s why prices remain firm and reluctant to fall.”

Banks’ Financial Reports and Valuation Test: Three Major Hurdles for U.S. Stocks to End the Year on a High Note

Investors should closely watch next week’s earnings reports from major banks to see how higher rates are impacting loans, M&A activity, and IPO plans. JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo will release earnings reports on October 13.

Earnings will also test the market’s high valuations. While the S&P 500’s forward P/E ratio has fallen to around 19, Bank of America notes that 17 out of 20 valuation metrics label the index as “expensive,” suggesting a potential annualized return of -3% over the next decade.

In the short term, Bank of America says its momentum and value models favor the energy, technology, and communication services sectors. Jefferies prefers sectors with earnings improvements and “macro support,” pointing out that financials, healthcare, technology, and materials will benefit.

For U.S. stocks to remain strong by year-end, several conditions must be met: mega-cap tech companies, banks, and other key players must outperform Wall Street expectations; bond yields must stabilize; and oil prices should drop, ideally to well below $100 a barrel with the support of an Iran peace deal.

If all these conditions are met, U.S. stocks could see a strong finish by year-end.