US earnings season preview: optimism builds ahead of third quarter results

​​​Earnings estimates rise in unusual break from historical patterns

​The third quarter (Q3) earnings season is set to begin with an unusual level of optimism. For the first time in recent memory, analysts have actually raised their earnings estimates during the quarter rather than cutting them, suggesting genuine confidence in corporate performance.

​Estimated earnings for the S&P 500 increased by 0.1% from 30 June to 30 September on a per-share basis. This marks a stark departure from typical quarterly patterns, where analysts tend to lower their forecasts as more information becomes available about trading conditions.

​Over the past five years, earnings expectations have fallen by an average of 1.4% during a quarter. Looking back over ten years, the average decline stands at 3.2%. The fact that estimates have moved higher this time suggests either exceptional corporate resilience or potentially stretched expectations that could disappoint.

​The S&P 500 is now expected to report year-over-year (YoY) earnings growth of 8.0%, up from the 7.3% growth rate anticipated at the start of the quarter. If achieved, this would mark the ninth consecutive quarter of earnings growth for the index, cementing the recovery from the 2022 correction.

​Record number of companies issue positive guidance

​Perhaps the most striking development ahead of this earnings season is the surge in positive guidance from companies. Of the 112 S&P 500 companies that have issued earnings guidance for Q3, 56 have provided positive outlooks while 56 have warned of disappointing results.

​The 50% positive guidance rate represents a significant departure from recent history. The five-year average stands at just 43%, whilst the ten-year average is even lower at 39%. The number of companies issuing positive guidance (56) is well above both the five-year average of 42 and the ten-year average of 39.

​This split between optimists and pessimists suggests a bifurcated market, where strong performers are pulling away from weaker rivals. The companies issuing positive guidance tend to be concentrated in technology, financials and industrials, whilst those warning of difficulties are more prevalent in energy and consumer staples.

​The willingness of management teams to provide upbeat forecasts stands in contrast to the cautious approach seen in recent quarters. Whether this confidence proves justified will become clear as results roll in over the coming weeks.

​Technology and financials lead sector growth expectations

​Eight of the eleven S&P 500 sectors are projected to report YoY earnings growth, led by Information Technology, Utilities, Materials and Financials. These sectors have benefited from a combination of strong demand, pricing power and operational efficiency gains.

​The technology sector continues to enjoy robust earnings growth driven by artificial intelligence (AI) investments, cloud computing adoption and semiconductor demand. Major technology companies have demonstrated an ability to grow revenues whilst maintaining or expanding profit margins, a rare achievement in the current environment.

​Financials have benefited from higher interest rates for longer than expected, supporting net interest margins at banks whilst trading revenues have remained resilient. The sector's performance will be closely watched for signs of credit stress or lending slowdowns that could presage broader economic weakness.

​Three sectors are predicted to report YoY declines in earnings, led by Energy and Consumer Staples. Energy companies continue to grapple with volatile oil prices and uncertainty around global demand, whilst consumer staples firms face margin pressure from persistent input cost inflation and cautious consumer spending.

​Revenue growth accelerates as margins hit record highs

​Analysts have raised their revenue growth expectations even more aggressively than earnings forecasts. The S&P 500 is now expected to report YoY revenue growth of 6.3%, up sharply from the 4.8% anticipated on 30 June.

​If achieved, this would mark the second-highest growth rate reported by the index since Q3 2022, when revenue surged 11.0%. It would also represent the 20th consecutive quarter of revenue growth, demonstrating the underlying resilience of corporate America.

​Ten sectors are projected to report year-over-year revenue gains, led by Information Technology, Communication Services and Health Care. Only the Energy sector is expected to post declining revenues, reflecting lower commodity prices compared to the prior-year period.

​Perhaps most remarkably, S&P 500 forward profit margins have reached record high levels of around 14%, as shown in Apollo's analysis. This represents a significant achievement given the inflationary pressures and wage growth that companies have navigated over the past two years.

Valuation concerns emerge despite earnings optimism

​Whilst earnings expectations have improved, valuations have risen even faster, creating potential concerns about risk-reward dynamics. The forward 12-month price-to-earnings ratio for the S&P 500 now stands at 22.8, well above the five-year average of 19.9 and the ten-year average of 18.6.

​This price-to-earnings (P/E) ratio has also increased from the 22.1 recorded at the end of the second quarter (Q2) on 30 June, despite the market's strong performance over the summer. The expansion in multiples suggests investors are either pricing in accelerating earnings growth beyond current estimates or accepting lower future returns.

​The relationship between earnings growth and share price appreciation remains strong, as demonstrated by the ten-year chart showing how forward earnings per share (EPS) estimates have tracked index gains. However, periods where prices run ahead of earnings typically result in eventual multiple compression.

​For the fourth quarter (Q4) of 2025 through the Q2 of 2026, analysts are projecting earnings growth rates of 7.3%, 11.8% and 12.7% respectively. For calendar year 2025, the consensus calls for YoY earnings growth of 10.9%, which would need to be achieved to justify current valuations.

​Light positioning suggests room for further gains

​One factor that may support markets through earnings season is the relatively light positioning among investors. Goldman Sachs US Equity Sentiment Indicator registered a reading of negative 0.6 as of 26 September 2025, well below the level that would indicate stretched positioning.

​The indicator, which combines nine measures of positioning across institutional, retail and foreign investors, suggests that many market participants remain underinvested in US equities. This contrasts sharply with periods of market exuberance where positioning becomes extremely crowded.

​Historical analysis shows that light positioning often precedes further gains, as investors are forced to chase performance higher rather than selling into strength. The current reading indicates there is still room for increased allocation to equities if results meet or exceed expectations.

​However, the flipside is that disappointing results could trigger a sharper selloff, as the marginal buyer may not be present to support prices. The 50-50 split in company guidance suggests genuine uncertainty about trading conditions, making this earnings season particularly important for setting the tone into year-end.

​Historical context suggests bull market has further to run

​The current bull market, which began in October 2022 following the inflation-driven correction, has already delivered substantial returns. However, historical analysis suggests there may be more room to run before the cycle matures.

​Data on the length and severity of bear markets and subsequent bull markets shows that bull markets typically last around 70 months on average, with average returns of 221%. The current cycle is approximately 36 months old, suggesting it may only be at the halfway point if historical patterns hold.

​The 2022 bear market was relatively short and mild compared to previous downturns, with the S&P 500 falling roughly 25% from peak to trough. This compares to declines of 50% or more during the 2000-2002 tech bubble and the 2007-2009 financial crisis.

​The relatively shallow nature of the 2022 correction, combined with the swift policy response and resilient economy, suggests the subsequent bull market may have a longer runway than some investors fear. However, extended valuations and elevated profit margins create vulnerabilities if growth disappoints.

Key themes to watch as results unfold

​Several critical themes will emerge as companies report over the coming weeks. Margin sustainability will be paramount, as firms attempt to defend the record profitability levels achieved in recent quarters against wage pressures and potential demand softness.

​Guidance for the fourth quarter will be scrutinised closely, particularly given the bifurcated outlook from companies so far. Management commentary on consumer spending, business investment and inventory levels will provide insight into whether the economic momentum can be maintained into 2026.

​The performance of mega-cap technology companies will be especially important given their outsized influence on index returns. Any signs of slowing AI-related spending or weakness in cloud growth could trigger broader market concerns given the elevated expectations built into valuations.

​Finally, the health of the US consumer will be in focus through retail, restaurant and consumer discretionary results. With the labour market showing signs of cooling and savings rates normalising, evidence of spending caution could force a reassessment of the growth outlook.