The latest US reporting season confirms that corporate profitability remains a supportive pillar for the US equity market. The Q3 season has delivered strong absolute growth and upgrades relative to consensus estimates.
Specifically, the S&P 500 is on track for approximately 11% year-on-year earnings growth in the third quarter. This compares to a September 30 consensus estimate for Q3 of 7.5%. Revenue growth looks set to come in at a solid ~8%.
Full year CY25 estimates now stand at 11%, with CY26 estimates holding at 14% growth.
CY25 estimates have been edging up over the last few months after moving lower in the first half of the year.
We believe “full” US market valuations (the S&P 500 is trading on 23x 1-year forward expected earnings) need to be assessed in the context of an ongoing robust “double digit” earnings growth backdrop that supports the US market’s premium rating.
Valuations Elevated but Not Excessive
While there are signs of valuation froth at the individual stock level - particularly around the AI theme, the US market does not appear to be in a valuation bubble when assessed against its strong earnings fundamentals.
Once again, the US tech sector has continued to lead the way in terms of earnings growth and positive earnings surprise. The sector looks set to deliver 27% year-on-year earnings growth in Q3. This is up from the 21% estimate on September 30.
Expectations for technology sector earnings growth in CY26 stand at 22%. As is the case for the market overall, we feel the US tech sector’s valuation (32x 1-yr forward EPS) needs to be assessed against its earnings growth delivery and earnings growth prospects. From this perspective, the sector does not look expensive.
AI Capex Strength Accelerates
There are, of course, ongoing debates surrounding the sustainability of the AI-focused capex acceleration that is driving a fair portion of the tech earnings boom. However, those looking for clear cracks in the AI capex thesis didn’t receive a lot of ammunition from the Q3 results. Capex estimates were yet again upgraded and “compute supply” in its various forms continues to trail demand. As we have written about previously, this is a key distinguishing feature of the current capex cycle, versus the more speculative 1999/’00 internet fibre build-out.
Outside of tech, the financial sector also stood out this reporting season with 21% growth. The sector delivered a fairly broad pattern of earnings beats across much of the sector.
Elsewhere, apart from strong growth in the relatively small utilities (AI driven) and materials sectors, seven of the 11 tier 1 sectors delivered growth below the market average (see figure 1). However, despite modest absolute growth, earnings estimates were bested in six out of seven of these sectors. The notable exception was communication services.
This was mostly attributed to a headline miss from Meta, due to an unexpected one-off tax-charge. However, the core result was strong and revenue beat estimates soundly.
While earnings season is well over 80% complete, investors will be intensely focused on the results for the world’s largest stock - Nvidia, next week. The upgrading of hyperscalers’ capex plans during reporting season suggests strong underlying momentum is likely to continue. Consumer bell-weather Walmart (a stop 10 stock) will also be closely watched next week.
Profits Supportive but Macro Risks Persist
A strong profit backdrop remains a central supportive pillar of the US bull market, as it has for much of the last 10 years. The CY26 outlook appears robust at this stage. Like market price performance, the earnings cycle is undeniably being led by tech. However, sector earnings breadth is expected to broaden out in CY26 (see figure 7).
While the profit backdrop remains an important support, it is of course not the only influence on market performance. Particularly over the shorter term. Fed policy expectations will continue to be important and there is potential for disappointment, if the Fed does indeed pass on a December rate cut (currently ~70% priced).
While the US government shutdown is curtailing valuable information on the state of the US economy, the limited data suggests the US expansion is continuing at a decent pace. Perversely, this may be bad news for market hopes of another rate cut before year end.
Adding to the current macro uncertainty, the legality of President Trump’s tariffs is currently before the Supreme Court. A decision may not arrive before the second quarter of next year, and even in the event of an adverse decision for the Trump administration, tariffs may still be implemented via alternative legal statutes.
In summary, the US corporate sector has once again delivered strong aggregate earnings growth in the current reporting season, with estimates continuing to edge up. However, the current environment is not without its challenges. As a result of these macro uncertainties, the market upswing is unlikely to be smooth, with short-term risks currently elevated. However, a resilient profit cycle continues to provide positive support for the US share market over the medium-term.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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