Why earnings season should continue to support US stocks

​​​Rising estimates point to genuine strength

​The fourth quarter (Q4) earnings picture presents one of the more compelling bullish cases for US equities heading into 2026. In general, Q4 earnings per share (EPS) estimates track lower from 30 September through year end as analysts adjust for reality. But this year Q4 EPS estimates keep rising, a rare pattern that typically signals genuine underlying momentum.

​Post-financial crisis, only 2020 saw Q4 EPS rise this much at year end, and that was coming off the COVID-19 shock with unprecedented stimulus support. This time the strength appears more organic, driven by operational execution rather than extraordinary fiscal measures.

​The Q4 bottom-up EPS estimate has risen 0.4% since 30 September, versus a typical in-quarter decline averaging -1.6% over the past five years. This reversal of the usual pattern suggests companies are not just meeting expectations but exceeding them as the quarter unfolds.

​The growth estimate itself has climbed from 7.2% on 30 September to 8.3%, helped recently by Micron's positive surprise. When estimates rise during the quarter rather than fall, it creates a foundation for further gains as positive momentum feeds through to broader market sentiment.

​Management confidence signals continued strength

​Company guidance has been notably less negative than normal, providing further evidence of underlying strength. Of the 108 companies that have issued Q4 EPS guidance, 58 gave negative outlooks while 50 provided positive ones.

​Negative guidance represents 54% of all those providing guidance, sitting below both the five-year average of 58% and the ten-year average of 60%. This shift matters because management teams typically err heavily on the side of caution, preferring to underpromise and overdeliver.

​When managements are willing to set higher expectations, it usually reflects genuine confidence in their order books and operational performance. The relatively optimistic tone suggests business conditions remain supportive despite macro concerns about rates and inflation.

​This pattern of rising estimates combined with less pessimistic guidance creates a powerful tailwind for US equity markets. Markets reward positive surprises, and the setup heading into year-end results suggests surprises are more likely to come on the upside.

​Technology leadership drives broad-based growth

​Nine sectors are expected to grow earnings year-on-year YOY), with Information Technology leading at 25.7% growth. This isn't just about one or two mega-cap names carrying the market - the breadth of earnings growth provides a solid foundation for continued gains.

​Revenue growth is estimated at 7.6% YoY, which would mark the 21st consecutive quarter of revenue expansion. This sustained top-line growth demonstrates that demand remains healthy across the economy, not just in isolated pockets.

​The Magnificent 7 technology giants are forecast to grow earnings 22.7% in 2026 versus 12.5% for the other 493 companies. While this concentration has risks, it also means the market's leaders are delivering the growth to justify their valuations.

​Materials sector growth of 9.3% shows strength beyond technology, while even sectors facing headwinds like Consumer Discretionary have pockets of resilience. 

Margins remain robust despite cost pressures

​The Q4 net profit margin is estimated at 12.8%, sitting comfortably above the five-year average of 12.1%. Information Technology stands out with a remarkable 28.5% margin, but elevated profitability extends beyond just the tech sector.

​Companies have proven remarkably adept at protecting margins despite facing cost pressures. This operational discipline provides confidence that earnings growth can be sustained even if revenue growth moderates from current levels.

​The ability to maintain margins in a higher-cost environment demonstrates pricing power and operational efficiency. Both factors are crucial for sustaining earnings growth when top-line expansion becomes harder to achieve.

​For equity markets, margin stability matters as much as revenue growth. The fact that companies can protect profitability while still investing in growth initiatives suggests the earnings trajectory has room to run beyond 2025.

​2026 outlook reinforces bullish case

​Analysts project S&P 500 earnings growth of 15.0% in calendar year 2026, with revenue growth of 7.2%. All eleven sectors are expected to grow earnings, providing broad-based support for the market rather than relying on a handful of leaders.

​The rising Q4 estimate trajectory points to a strong earnings year ahead, with momentum likely to carry into the first half of 2026. This visibility on earnings growth provides a buffer against potential macro headwinds from rates or geopolitical developments.

​Even Energy, which faces a revenue decline forecast of 1.9%, is expected to grow earnings through improved efficiency and cost control. This demonstrates the market's ability to deliver profit growth even when some sectors face top-line challenges.

​The 2026 forecasts assume reasonable economic conditions rather than a boom scenario. If growth proves stronger than expected, there's upside potential to current estimates, providing another layer of support for shares.

​Valuation supported by growth trajectory

​The forward 12-month price-to-earnings (P/E) ratio sits at 21.8, above both the five-year average of 20.0 and the ten-year average of 18.7. While this might appear expensive in isolation, it's justified by the growth outlook and margin strength.

​Analysts' bottom-up target implies 18.2% upside for the S&P 500, with ratings skewing heavily bullish at 57.5% buy recommendations versus just 4.8% sell ratings. This consensus view reflects confidence that current valuations can be supported by earnings delivery.

​The premium valuation becomes easier to justify when earnings are rising at mid-teens growth rates. On a PEG ratio basis (P/E divided by growth rate), the market doesn't look particularly stretched given the 15% earnings growth forecast for 2026.

​For traders, the combination of rising estimates, strong margins and robust 2026 forecasts provides multiple reasons to maintain exposure to US equities. While pullbacks will occur, the earnings backdrop suggests buying dips makes more sense than fighting the trend.