US Q3 earnings season preview: profits remain a bright spot

Highlights: Despite renewed fiscal uncertainty from the recent government shutdown, US corporate earnings remain resilient, reflecting solid business fundamentals and investor confidence. While growth among the Magnificent 7 is projected to moderate in the upcoming quarters, expectations may now be too low. Meanwhile, earnings momentum across the broader market is accelerating, fuelled by AI-driven productivity gains and improving profitability. Easing financial conditions, upward earnings growth revisions, secular themes like reshoring and re-industrialisation, and continued AI-driven innovation support our mild overweight on US equities. We maintain our US sector overweight in IT, Communications Services, Industrials, and Financials, while exercising caution on Consumer Staples.

• US corporate earnings remain strong, with S&P 500 profits projected to rise 8.0 per cent YoY in 3Q 2025, marking the ninth consecutive quarter of earnings growth. 3Q earnings growth remains broad-based, led by Technology (+20.9 per cent), Utilities (+17.9 per cent), Materials (+13.9 per cent), Financials (+11.5 per cent), and Industrials (+9.7 per cent), while Consumer Staples (-3.1 per cent) and Energy (-4.0 per cent) continue to lag
• For 2025, S&P 500 earnings are forecast to rise 10.9 per cent, accelerating from 10.6 per cent in 2024, supported by strength in Technology, Communication Services, and Healthcare. Revenues are expected to grow 6.1 per cent in 2025, up from 5.2 per cent last year, driven by solid gains in Technology and Healthcare
• In 2026, earnings are forecast to climb 13.8 per cent, with nine of eleven sectors expected to deliver double-digit growth as AI-driven productivity and broader participation extend the market rally. It is important to remember that the “Magnificent 7” are expected to see slower earnings growth over the next six quarters. Their earnings are expected to slow from 25 per cent YoY in 3Q25 to 11 per cent in 4Q 2026. Earnings for the “Forgotten 493” are forecast to accelerate over the next six quarters. They are expected to improve from 4 per cent YoY in 3Q 25 to almost 15 per cent YoY—almost four-fold by 4Q 26
• This is in part due to easy comps, but more importantly, resulting from expected increase in productivity and profitability due to the continued diffusion of AI throughout the sectors of the US economy. ~USD2.6 trillion were added to money markets since the Fed began tightening in 2022, much of which will probably shift to other asset classes in search of better returns
• Compared to European markets, where the bulk of the rally this year has come from an increase in valuation multiples, US stocks have principally been driven by earnings improvements. Easing monetary conditions, combined with upward earnings revisions and ongoing AI-driven innovation, support our mild overweight position in US equities