S&P 500 earnings: AI optimism faces the test of higher rates

Third-quarter earnings face exceptionally high expectations

Analysts are approaching the third-quarter earnings season with considerable optimism. According to LSEG I/B/E/S estimates cited in the 13 October analysis, S&P 500 earnings are expected to grow 30.6% year on year in the third quarter of 2026 and 28.5% in the fourth. If achieved, the index would record four consecutive quarters with growth close to or above 30%, a sequence not seen since the reopening after the COVID-19 pandemic.

Companies' own forecasts reinforce these expectations. FactSet reports that 72 of the 116 companies that have updated their guidance have raised their projections, equivalent to 62% of the total. Technology accounts for much of the optimism, with 44 companies improving their estimates.

Analysts also retain a bullish outlook. FactSet's aggregate 12-month S&P 500 price target stands at 9,275.04 points, implying potential upside of close to 18%. All 11 sectors have projected upside above 10%, led by utilities at 28%, consumer discretionary at 26% and industrials at 25.1%. These are analyst forecasts, not guaranteed returns.

Demanding valuations and widening sector differences

Much of that expected growth may already be reflected in prices. The S&P 500 trades at a forward price-to-earnings ratio of 19.1 and a trailing ratio of 26, placing valuations around the 75th percentile of their historical ranges.

The comparison with fixed income raises the hurdle further. A price-to-earnings ratio of 26 implies an earnings yield of approximately 3.85%, below the 5.25% yield on ten-year US Treasury notes cited in the source analysis. The two measures are not directly equivalent, but the comparison illustrates the demanding equity valuations relative to interest rates.

Sector differences are substantial. Utilities (XLU), financials (XLF), energy (XLE) and materials (XLB), which are sensitive to financing costs, carry relatively more moderate valuations.

Technology (XLK), communication services (XLC) and parts of industrials (XLI), by contrast, concentrate the optimism surrounding AI infrastructure, with stronger growth expectations and more demanding valuation multiples.

Sector performance grouped by exposure to the AI investment cycle

Source: TradingView, 13 October 2026

Major US banks provide the first test

The season begins with six major US banks: JPMorgan Chase, Goldman Sachs, Citigroup, Wells Fargo, Bank of America and Morgan Stanley.

Consensus estimates point to aggregate earnings growth of 3.0% and revenue growth of 7.2% for this group, significantly slower than forecasts for the S&P 500 as a whole.

Valuations offer some support. The financial sector's forward price-to-earnings ratio of 14.3 is close to its historical average. However, the sharp rise in short-term interest rates and the flattening of the US yield curve have increased pressure on some banking activities.

The results will show how net interest margins, loan demand and balance-sheet quality are developing. Investment banking and trading revenue could offset some of the pressure on traditional banking operations.

The major banks will therefore provide an early gauge of how the real economy is coping with increasingly demanding interest rates. Strong results could support a recovery in lagging sectors, while disappointment would reinforce the market's reliance on AI-led growth.

S&P 500 companies worth more than $200bn reporting this week

Source: TradingView, 13 October 2026