Earnings season 2026: high expectations meet rising bond yields | CMC Markets
Earnings season 2026: high expectations meet rising bond yields
Andreas Lipkow
Chief Market Analyst
High earnings expectations meet rising bond yields as reporting season tests equity valuations. Banks, semiconductors and software must show that margins, cash flow and AI investment can justify share prices.
The third-quarter 2026 earnings season is beginning in the US and Europe under unusual conditions. Following strong gains across global equity markets, companies must show that their operating performance can keep pace with higher valuations. Equities also face growing competition from government bonds. The sharp rise in US yields has changed the investment backdrop: when relatively low-risk sovereign debt offers attractive income, investors demand more from equities and future earnings growth.
The bar is high. S&P 500 companies are expected to deliver year-on-year earnings growth of 29.5% in the third quarter, with forecasts for full-year 2026 standing at 32.4%. Analysts also rate around 60% of S&P 500 stocks as buys. Such optimism creates considerable scope for disappointment. Good results alone may no longer drive further share-price gains; companies will need to defend margins, beat expectations and provide convincing outlooks.
Government bonds compete with equities
One of the biggest changes from previous earnings seasons is the higher level of bond yields. For years, low or even negative interest rates effectively pushed investors towards riskier assets. That environment has changed fundamentally. Ten-year US Treasury yields of around 5% or more offer a serious alternative to equities.
The equity risk premium is central to this comparison: it is the additional return investors expect for taking equity risk rather than holding government bonds. If bond yields rise without a corresponding increase in corporate earnings, equity valuations come under pressure.
Highly valued growth companies are particularly exposed because much of their expected profit and cash flow lies far in the future. Higher discount rates reduce the present value of those returns. Strong enough earnings growth can offset this effect, making the reporting season a test of whether companies can grow into their valuations.
US banks provide an early economic check
Recent results from major US banks paint a broadly resilient, but increasingly mixed, picture of the economy. JPMorgan Chase, Goldman Sachs, Morgan Stanley, Bank of America and Wells Fargo benefited in the third quarter of 2026 from steady credit demand, higher net interest income and strong capital-markets activity. However, their earnings performances varied, while rising bond yields, financing costs and regulatory burdens created fresh challenges.
JPMorgan Chase increased quarterly profit by around 6% year on year to $15.3bn. Revenue on a managed basis reached $50.9bn. Net interest income rose a notable 13% to around $27.1bn, while credit quality remained relatively stable. Credit-loss provisions of $2.7bn were below the year-earlier level, suggesting that US consumers and businesses have largely coped with elevated rates so far.
Wells Fargo also benefited from higher loan and deposit volumes. Net interest income rose 5% to $12.5bn, although this fell short of market expectations. Revenue of $21.9bn generated net profit of around $6bn. Credit-loss provisions rose to about $1bn. Lending remains profitable, but rising credit risks and pressure on interest margins warrant close attention.
Bank of America delivered a more mixed picture. Net interest income rose 8% to $16.4bn and total revenue increased 3% to almost $30bn, but net profit fell to $6.9bn. A $1.2bn regulatory settlement was a particular drag. Credit-loss provisions remained broadly stable at around $1.3bn.
Capital-markets businesses performed more strongly. Goldman Sachs increased quarterly revenue by 23% to $18.7bn and net profit to $5.3bn. Equity trading and investment banking benefited particularly from greater market activity. Morgan Stanley also reported higher revenue of $20.3bn and net profit of $4.9bn. Its wealth-management business attracted $232bn of new client assets during the quarter alone.
The AI investment boom has become an important growth driver. Large technology companies need substantial financing for data centres, semiconductors and infrastructure. IPOs, capital-markets transactions and asset inflows also generate additional fees for investment banking and wealth management.
Overall, bank results point to a resilient US economy without providing a complete all-clear. Credit demand and capital-markets activity remain robust, but persistently high rates, rising refinancing costs and any slowdown in AI investment could weigh on future earnings. Stable credit quality and sustained capital-markets activity will therefore be crucial in the coming quarters.
AI and technology face a reality check
Expectations are particularly high in technology. Nvidia, Broadcom, Micron, AMD and numerous infrastructure companies are benefiting from a global AI investment cycle whose effects now extend far beyond semiconductors.
Hyperscalers are spending heavily on AI accelerators, data centres, memory chips, networking, power supplies and cooling. Their investment budgets for 2027 and beyond will be particularly important. Microsoft, Amazon, Alphabet and Meta are major buyers of AI infrastructure, so changes in their plans can have an immediate impact across the supply chain.
Further increases in spending would support the case for a longer-lasting AI cycle. More cautious forecasts could instead cast doubt on suppliers' ambitious growth assumptions.
Semiconductors: margins matter more than revenue records
Gross margins, orders, production capacity and capital expenditure are becoming increasingly important in semiconductors. High margins signal strong demand and pricing power. If margins fall despite rising revenue, this could indicate a gradual normalisation of supply and demand.
The traditional semiconductor cycle should not be underestimated. High prices and tight capacity encourage heavy investment in new facilities, potentially creating oversupply later. Comments on expected demand in 2027 and 2028 may therefore matter more than the latest quarter's results.
ASML's results have attracted particular attention. The Dutch semiconductor-equipment maker benefited significantly in the third quarter of 2026 from global spending on AI infrastructure and advanced chip production. Revenue rose around 55% year on year to €11.7bn, while net profit approached €5bn. Positive valuation effects from its stake in French AI company Mistral AI also supported earnings. Gross margin improved to 57.5%, highlighting ASML's strong position in advanced lithography.
Sustained demand prompted ASML to raise its full-year 2026 revenue forecast to €44bn–€45bn. Management indicated that planned production capacity for 2027 and 2028 might still be insufficient to meet expected demand. The results provide further evidence of strong global investment in AI and semiconductor manufacturing. However, technology companies' exceptionally high capital expenditure could normalise over the medium term if AI monetisation disappoints. The sector's prospects will depend on whether high growth expectations translate into sustainably rising profits.
Software: AI must generate revenue
Software companies also face increasing pressure to deliver. Following heavy investment in AI applications, copilots and autonomous agents, they must demonstrate that these technologies can generate additional revenue and profit.
Investors are likely to focus more closely on AI-related revenue, average revenue per customer, contract duration, operating margins and free cash flow. Markets may increasingly distinguish between companies using AI mainly as a marketing theme and those generating meaningful additional income from it.
Often-high software valuations mean higher interest rates add to the pressure on companies to meet growth expectations.
US consumption: how resilient are consumers?
US consumers have proved surprisingly resilient so far. However, high financing costs and a cooling labour market could increasingly weigh on demand.
Retail, hospitality, tourism and consumer-goods companies provide important evidence of household purchasing power. The distinction between price-led and volume-led growth will be particularly revealing.
Many companies have recently increased revenue by charging higher prices. If sales volumes decline at the same time, that may point to weakening demand. Companies able to raise both prices and volumes are in a much stronger competitive position.
Industry and energy: AI infrastructure meets cost pressure
The AI boom is increasingly reaching traditional industrial businesses. Data centres require substantial electricity, transformers, cooling systems, generators and electrical components. Electrification, power supply, automation and data-centre infrastructure companies stand to benefit.
Orders and backlogs will be particularly important. Rising orders could confirm that the AI investment cycle is broadening into physical infrastructure. Industrial companies must also show that they can pass higher materials, energy and financing costs on to customers.
Energy occupies a distinct position. High oil and gas prices can substantially increase producers' profits, but also burden consumers and businesses and add to inflation.
For oil and gas companies, production costs, refining margins, capital budgets and free cash flow will be central. Dividends and buybacks remain important valuation measures. For the broader market, high energy prices combined with rising bond yields could be particularly problematic.
Europe's earnings season has different priorities
Europe's earnings season differs structurally from that of the US. Technology accounts for a large share of US market capitalisation, while Europe has greater exposure to banks, insurers, industrials, automotive manufacturers, chemicals, energy and luxury goods.
For European banks, interest margins, credit quality and capital strength are key. Rising sovereign yields can support interest income, but may also raise refinancing costs and create valuation losses on bond holdings. Wider yield spreads between eurozone countries could matter particularly for banks holding large amounts of domestic government debt.
Automotive: China remains the biggest challenge
China remains a crucial market for Volkswagen, Mercedes-Benz, BMW and other European automotive manufacturers. Intensifying competition from Chinese electric-vehicle makers is putting market share and margins under pressure.
Investors will focus on sales, discounts and profitability. Discounts may support volumes in the short term but can seriously erode margins if used persistently. Electric vehicles, software and batteries also require substantial investment, made harder to finance by higher rates.
Luxury goods: Chinese consumers help determine the outcome
Chinese demand also remains a major influence on European luxury companies such as LVMH, Hermès and Kering. Investors will watch whether spending stabilises and whether revenue growth still comes mainly from price rises or increasingly from volumes. LVMH has already provided useful evidence, missing analysts' expectations as demand for fashion and leather goods remained sluggish in the important Chinese market.
The strategy of substantial price increases that worked for years may become harder to sustain if consumers grow more price-sensitive.
Earnings yields versus bond yields
Across sectors, equities again face stronger competition from government bonds. If ten-year US Treasuries yield around 5% while highly valued stocks offer low earnings yields, investors need confidence in strong future profit growth. Higher bond yields raise the bar for equities, helping explain sharp reactions to disappointing forecasts. At the same time, attractively valued businesses with high free-cash-flow yields could regain attention. Strong balance sheets, low debt and healthy current cash flows reduce dependence on future earnings expectations and external financing.
Earnings quality will be decisive
Investors should look beyond earnings per share. Companies can beat EPS forecasts while disappointing operationally. Buybacks, lower tax rates, cost savings or one-off effects may lift EPS without equivalent growth in the underlying business. Revenue trends, organic growth, margins, orders and especially free cash flow are more informative. When rates are high, cash actually generated becomes more important relative to accounting profit. Companies able to fund expansion internally have a structural advantage over those regularly needing new debt or equity.
Earnings season becomes a test of valuation and quality
The reporting season is likely to be more than a routine presentation of quarterly results. Companies must demonstrate that profits can grow fast enough to justify high valuations and increased financing costs.
Quarterly figures record the past, while share prices reflect the future. Company guidance is therefore likely to be particularly important this season.
Technology, semiconductors, software, banks, consumer businesses, industry and energy will be central. In Europe, automotive and luxury companies provide additional important indicators.
The key question is whether companies can sustainably increase margins and cash flow despite high financing costs. Earnings quality, free cash flow and forecasts for 2027 may matter more than simply beating individual quarterly estimates.
The season will therefore test the high expectations embedded in equity markets. It should reveal which companies can grow profitably in demanding conditions, and where share prices may already anticipate too much future success.
