Wall Street needs an exceptional earnings season to sustain the rally

what happened

Dow Jones Newswires, citing Barron's, reports that Wall Street is entering one of its most consequential earnings seasons in years. Investors are weighing results against higher bond yields, rising oil prices and uncertainty over the future of the artificial-intelligence investment race. The S&P 500 is just below its record level, yet it has gained only 2.4% since the end of May, equal to about 0.6% per month. During the first five months of the year, the index advanced more than 10.7%, averaging roughly 2.1% a month.

The market's sluggish performance has arrived despite exceptionally strong profit growth. S&P 500 earnings climbed 35.1% in the second quarter and 30.1% in the first half, the strongest showing since the postpandemic recovery of 2021. Treasury yields, however, have risen alongside a Federal Reserve tightening cycle, faster inflation pressures linked to the U.S. war with Iran and a sharp increase in crude prices. That combination has muted the equity market's response to robust corporate results.

LSEG expects aggregate third-quarter earnings to be 30% above the year-earlier level. Technology is again positioned to lead: the three S&P 500 sectors containing the so-called Magnificent Seven are projected to generate nearly half of the quarter's anticipated $773 billion in profits. Microsoft, Meta Platforms, Alphabet, Apple and Nvidia have supplied about 90% of the index's gains over the past two months. Goldman Sachs data indicates that the 10 largest, technology-linked stocks may account for roughly 37% of total S&P 500 earnings, the highest proportion in more than two decades.

Other parts of the market are losing momentum. Financial-sector profits rose 25% in the second quarter but are expected to increase just 5.3% in the three months through September. JPMorgan Chase starts the reporting cycle on Tuesday, followed by the six other major lenders over the next two days. Consumer-discretionary earnings, which include Magnificent Seven member Amazon.com, are projected to slow from 91% growth to 3.2%. Healthcare earnings are expected to rise 5.2%. Bank of America sees profits outside technology, energy and finance increasing 5%, down from 7.7% in the second quarter.

Investors also face a tense backdrop. The 10-year U.S. Treasury yield is at its highest level in about two decades, oil remains above $100 a barrel and traders are pricing in at least one more Federal Reserve rate increase this year. Midterm elections take place in November, with polling pointing to a possible Democratic majority in the House and potential control of the Senate once early-November ballots are counted and certified.

October has hosted the market crashes of 1929, 1987 and 2008, while its average performance since 1950 ranks seventh among the 12 calendar months. Yet in midterm-election years, gains of at least 3% have occurred nearly 74% of the time. The fourth quarter of a midterm year and the following two quarters of a pre-election year are described as the three strongest quarters in the four-year presidential cycle.

Year-end S&P 500 targets are clustered near 8000, implying an increase of about 4.3% from present levels and a 6.6% rise compared with the end of the first half of 2026. Wall Street is not broadly expecting a swift end to the bond-market selloff, a rapid resolution of the war in the Gulf or an abrupt shift toward easier Fed policy. Anthony Saglimbene of Ameriprise says equities have historically coped with higher-rate periods when economic activity and profits continued to expand. A steady AI trade and a firm 2027 growth and earnings outlook would also remain important, he says.

why it matters

The central market question is whether earnings growth can offset pressure from elevated rates, Treasury yields, oil prices and geopolitical risks. Results from major technology companies will be especially important, as investors assess whether heavy AI spending is translating into sustainable profits.

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