Senate Republicans to challenge auto safety mandates in January - WSJ
Third quarter earnings season winds down over the next couple of weeks and has once again met Wall Street’s high expectations. After tariff-muddled first quarter results, companies did a good job adjusting to tariffs in the second quarter and continued to do so last quarter. A strong beat rate and another quarter of double-digit earnings growth proved corporate America’s resilience, bolstered by mega cap technology’s artificial intelligence (AI) investment.
Here we recap third quarter earnings season, when more stayed the same than changed. Hat tip to profit margins.
One of the Highest Beat Rates Ever Recorded
Corporate America delivered another exceptional earnings season, with companies continuing to adjust to a shifting macroeconomic landscape. Companies effectively navigated cost pressures during the quarter (of note, tariffs were less of a focal point in earnings calls), although a few moving pieces supported third quarter results.
Among earnings highlights:
- S&P 500 earnings per share (EPS) growth is tracking over 13%, with 95% of companies having reported, cruising past the 7.4% consensus forecast at quarter-end on September 30.
- S&P 500 revenue grew 8.4%, an atypically strong 2.5% above expectations at quarter-end.
- The average earnings upside surprise of 7.0% matches the 10-year average but fell short of the 8.4% five-year average. Given the bar has been steadily rising over the past six months, these numbers are more impressive than they seem on the surface.
- A strong 82% of companies beat EPS targets, above the five-year average (78%) and nearly topping the third quarter of 2021’s recent high of 82.2%.
- The revenue beat rate of 76% tops the five-year average (70%).
- The fastest earnings growth for the quarter was generated by technology (28.4%), financials (23.5%), and utilities (23.1%).
- Technology (15.9%), healthcare (10.4%), and communication services (10.0%) delivered the strongest revenue growth.
Several factors likely played a role in last quarter’s strong results. Unexpectedly strong economic growth in the third quarter provided support. Gross domestic product (GDP) growth may reach 3% annualized despite the slowdown in job growth. Lower expected tariffs helped, as the amount of upside was likely inflated by companies guiding conservatively for the third quarter back in July and August given the uncertainty.
Bottom line, these numbers are quite impressive, particularly given the current economic and earnings cycles have been going awhile post-COVID-19. Expectations keep rising, the bar keeps going higher, and corporate America continues to clear it handily.
String of Double-Digit Earnings Growth Extended; Will It Continue?
Big tech and the Magnificent (Mag) Seven remained on center stage this earnings season, delivering another quarter of robust earnings growth. As shown in the “Mag Seven Earnings Growth Poised to Slow But Remains Robust” chart, this group continues to dominate the earnings growth of the rest of the S&P 500.
The Mag Seven drove about half of the 15–16% earnings growth for the S&P 500 in the third quarter if Meta’s $15.9 billion one-time tax change is excluded. Excluding Tesla, the Mag Seven grew earnings about 30% as a group.
The third quarter saw a slight acceleration in Mag Seven earnings growth, suggesting to us that estimates over the next couple of quarters could be too low. The earnings growth gap between mega cap tech and the rest of the market is still huge right now, even if poised to narrow in 2026, and underpins LPL Research’s continued preference for large growth equities.
This group of mega cap stocks has notably increased capital expenditures (capex) spending plans. The big five hyperscalers raised capex guidance for 2025 and 2026, with the latest guidance indicating spending could surpass $560 billion by 2027.
Margins More Than Held Up in the Face of Tariffs
The largest portion of the higher tariffs was expected to come through during the third quarter as pre-tariff inventory dwindled and Washington’s tariff pause concluded. But in arguably the biggest surprise of the season, net profit margins for the S&P 500 increased to an all-time high.
Technology, financials, and communication services led year-over-year net margin increases. Services businesses remained relatively insulated from cost pressures last quarter. Operating margins expanded to 16%.
Considering the bulk of tariff effects have likely trickled through and margins still expanded, efficiency and profitability remain on solid footing. AI is poised to drive further operating margin growth.
As 2026 Approaches, Capital Investment Dollars Keep Getting Bigger
Consensus S&P 500 EPS estimates rose during earnings season—an unusual trend. Despite tariff pressures, the consensus EPS estimate for 2026 has fallen just 1%.
Capital investment from major hyperscalers is expected to increase sharply in 2025 and 2026. AI spend, productivity gains, and fiscal stimulus will help.
Investors have rewarded EPS beats less than average. Post-earnings one-day performance has leaned negative. Optimism priced into equities, AI scrutiny, and shifting Federal Reserve expectations are likely factors.
Retail earnings suggested continued pressure on middle- and low-income consumers due to sticky inflation and reduced real spending power.
Conclusion
Third quarter earnings season continued to highlight corporate America’s resilience. Companies managed tariffs effectively and delivered strong guidance. The Mag Seven remained the key engine of earnings growth.
AI investment, tariff stabilization, and supportive policy position earnings for continued strength in 2026.
We maintain a tactically neutral stance on equities. Volatility may occur due to valuations, but broad fundamentals remain supportive. Long-term trends still favor large caps and growth. Bond positioning remains neutral with a slight preference for mortgage-backed securities.
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Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.