As of October 28, 2026
Third quarter earnings season is roughly a quarter of the way through, and the numbers are strong by many measures. According to FactSet’s October 23 report, the S&P 500 is on pace for 29.5% year-over-year earnings growth, which would mark the third consecutive quarter above 25% and the eighth straight quarter of double-digit growth. Of the companies that have reported, 83% have beaten their earnings estimate, although aggregate earnings have exceeded expectations by just 2.1%, compared with a five-year average of 7.5%. Most companies are clearing the bar, and the bar has been rising.
Prices have gone the other way. The Nasdaq-100 has fallen 7.3% from its October 6 high as of October 28, the S&P 500 is down 2.5% over the same stretch, and the Nasdaq-100 has now lagged the S&P 500 for three consecutive weeks. The market is rewarding companies that beat while paying less for earnings overall.
Where the Growth Comes From
Exhibit 1 shows the headline growth rate alongside what sits underneath it. Ten of eleven sectors are growing earnings, but the contributions are far from even. Energy leads at 136%, a function of oil averaging $85.68 in the quarter against $64.97 a year ago. Information Technology is growing 65.6%, and without the semiconductor industry that figure falls to 24.9%. Communication Services is growing 39.8%, but two companies, EchoStar and Meta Platforms, account for most of it, each because of a one-time charge in the prior-year quarter. Without them the sector grows 12.9%. Health Care, the one sector in decline, would be growing 9.4% if pharmaceuticals were excluded.
The growth is substantial, but it is narrow. Energy’s contribution is an oil price story. Outside Energy, much of the improvement sits in semiconductors and the other suppliers of the artificial intelligence buildout, which are the names the Nasdaq-100 holds in size. When growth is concentrated, so is the exposure to any change in what investors will pay for it.
Where the Selling Has Been
Exhibit 2 indexes the S&P 500 and the Nasdaq-100 to the start of the year. Both are up double digits in 2026, and the Nasdaq-100 led for most of the year. Since the October 6 peak the lines have separated: a 2.5% pullback for the broad index, 7.3% for the Nasdaq-100, in the same weeks that investors appeared to begin questioning how the artificial intelligence buildout is being financed rather than whether the demand exists.
The scorecard suggests the selling is not a reaction to the reports themselves. FactSet finds that companies beating estimates this quarter have gained 1.3% on average around the release, above the five-year average of 0.9%, while companies that missed have fallen 0.4%, against a five-year average decline of 3.1%. Recent market reactions suggest continued positive responses to earnings beats and relatively muted reactions to earnings misses, which may point to a weakness rooted less in disappointing reports than in what investors are willing to pay for future growth.
What the Multiple Says
Exhibit 3 shows the result. The S&P 500 trades at 18.7 times the next twelve months of expected earnings, below its five-year average of 19.8 and its ten-year average of 19.1. Since September 30 the index price has risen 0.2% while the forward earnings estimate has risen 2.0%. Investors are paying less for each dollar of expected profit than they did a month ago, and slightly less than they have on average for a decade. That is a discount to history, not a cheap market.
It is also a discount that depends on the denominator. On trailing earnings the index trades at 25.7 times, above both long-run averages. What bridges an expensive trailing multiple and a below-average forward one is expected growth, and FactSet’s quarterly estimates show that growth slowing from 29.2% in the fourth quarter to 19.6% in the first quarter of 2027 and 2.9% by the second. That is a sharp deceleration, not a contraction; analysts still expect positive year-over-year growth in each quarter. The apparent discount depends on those expectations being realized, and the market’s recent behavior is consistent with investors beginning to discount the point where the growth curve bends, even if it does not prove it. Whether that reflects doubt about the durability of earnings growth or simply a higher required return, the implication for valuations is much the same.
For Advisors
A market can post strong earnings and still decline, because prices can move on the change in expectations rather than the level of results. When expectations are already high, even impressive earnings may not hold a valuation, and the drawdown can land first on the companies that carried the most expectation. A portfolio concentrated in the year’s leaders may feel that reset more than the headline index does, which illustrates why some investors may consider diversification in a market like this one. One consideration for advisors is not only whether earnings are good, but whether a portfolio remains aligned with a client’s objectives and risk tolerance if very good earnings stop being a surprise.
Disclaimer
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