Wall Street is bracing for what could be one of the most important earnings seasons in years over the coming weeks, as markets confront an unappetizing cocktail of surging bond yields, rising oil prices, and concerns about the fate of the artificial-intelligence investment race.
The S&P 500 is hovering just below record highs, but its performance over the past few months has been distinctly mediocre, with a rise of just 2.4% from the end of May, or 0.6% per month. That compares to the roaring gains over the first five months of the year, which saw the benchmark rise more than 10.7%, for an average monthly gain of around 2.1%.
Curiously, the recent spate of subpar performance has come despite the most explosive earnings growth in years.
Second-quarter profits for the S&P 500 rose by a staggering 35.1%, powered by tech and the AI trade, for a 30.1% gain for the first half of the year -- the best set of gains since the postpandemic recovery of 2021.
But a surge in Treasury yields -- tied to a Federal Reserve rate-hiking cycle, accelerating inflation pressures linked to the U.S. war with Iran, and the massive advance in crude prices it's stoked -- has slowed the market's response to the impressive corporate profits.
That puts this third-quarter earnings season sharply in focus, as stocks look to navigate a tricky end to the year with midterm elections looming in November, plus the continuing overhang from the Iran conflict and Fed policy that has leaned notably hawkish into the autumn months.
Still, LSEG forecasts suggest another hugely impressive set of results is coming, with collective profits set to rise 30% from last year.
"Earnings growth remains this bull market's north star," says Keith Lerner, chief market strategist at Truist Advisory.
"The sustainability of that growth, the ability of AI and tech companies to monetize all the capital spending, along with the direction of interest rates and valuations, will be central to determining whether the bull market can extend its advance," he adds.
Tech will lead the charge, as ever, with the three S&P 500 sectors that house the so-called Magnificent Seven giants likely to deliver nearly half of the $773 billion in expected earnings for the quarter.
Markets have already adjusted to that, to some degree, with a late-summer narrowing that has seen just a handful of stocks (Microsoft, Meta Platforms, Alphabet, Apple, and Nvidia) contribute around 90% of the S&P 500's gains over the past two months.
Goldman Sachs data also suggests that the S&P 500's top 10 stocks, all of which are tied to the tech sector, will deliver around 37% of the benchmark's overall earnings this quarter, the highest share in more than two decades.
But while the market's tech-led resilience remains firmly in place, other sectors that made big contributions to the first-half growth rate are starting to fade.
Financial stocks, which saw profits rise 25% in the second quarter, are only forecast to see a modest 5.3% advance over the three months ended in September. JPMorgan Chase will kick things off on Tuesday, with each of the six major lenders following over the next two days.
The consumer discretionary sector, home to Magnificent Seven stalwart Amazon.com, is expected to see earnings growth slow from 91% to 3.2%, while healthcare, the best-performing sector behind energy during the third quarter, should only see earnings rise by 5.2%.
Bank of America suggests earnings for sectors outside of tech, energy, and finance will likely rise 5% from last year, down from the 7.7% they recorded over the second quarter.
And markets are feeling sensitive.
Benchmark 10-year Treasury yields are trading at the highest levels in about two decades, while oil remains firmly north of $100 a barrel. and traders are betting that the Fed will raise its benchmark rate at least one more time this year.
Midterm elections loom, as well, with polling now suggesting a Democratic majority in the House and possible control of the Senate once the early November ballots are counted and agreed.
October market performance, meanwhile, can get a little bit spooky. Spectacular markets crashes in 1929, 1987, and 2008 all occurred in the tenth month of the year, and the month's overall gains since 1950 rank seventh out of the calendar's 12.
But, as Carson Group's Ryan Detrick notes, "where this month gets really interesting is in midterm election years," with data showing "gains of 3% or more nearly 74% of the time."
"Taking this a step further, the fourth quarter of a midterm year and the first two quarters of a pre-election year (the next three quarters) are the three best quarters out of the entire 4-year presidential cycle," Detrick adds. "Overall we remain optimistic this bull market is alive and well."
Whether another powerhouse earnings season can drive markets firmly higher into the end of the year remains to be seen, but Wall Street isn't holding its breath.
End-of-year price targets cluster around the 8000 point mark for the S&P 500, a modest 4.3% gain from current levels and a 6.6% advance over the first half of 2026.
And few are predicting a slowdown in the bond market selloff, a quick resolution to the war in the Gulf, or a sudden grip of dovishness on the Fed.
But that might not matter, according to Anthony Saglimbene, chief market strategist at Ameriprise.
"Stocks have historically weathered rising-rate periods when the economy and profits kept growing," he says. "And they have room to move higher if the 2027 outlook for growth and profits remains firm."
"Of course, any advance in stock prices through year-end will likely require a steady AI trade as well," Saglimbene adds.
Corporate America has proven to be incredibly adept at making money over the past five years, regardless of the economic or global risk backdrop. Wall Street seems pretty sure that's set to continue. But whether that's enough to keep the bull market on track remains to be seen.
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