Q3 Earnings Could Be the Catalyst the Market Has Been Waiting For

Key Points

• Q3 earnings season, starting in October, is expected to again beat a lowball consensus of 28.5% growth after Q1 and Q2 results far exceeded estimates.
• Energy and technology sectors, fueled by high oil prices and AI-related spending from companies like NVIDIA and AMD, are driving much of the earnings outperformance.
• Analysts may be underestimating 2027 earnings growth, with the S&P 500 potentially advancing to 8,500 or higher, though falling oil prices pose a key risk.

Q3 earnings reporting, which kicks off in October, looks set to be another solid season for the market. While factors including geopolitics, oil, inflation, and the FOMC point to volatility, earnings trends and seasonal trends suggest a robust rally will follow.

Seasonally, Q4 is typically the strongest of the year, often starting off slow and then ending with a bang, usually capped off by a Santa Claus Rally. This year, the stage is set for significant outperformance and an affirmation of next year’s results that may lead to a substantial market reset.

The S&P 500 historically outperforms its consensus estimates, but outperformance tends to run in the low-single-digit range. Today's narrative is that Q1 and Q2 results were so far above consensus that they revealed a major market disconnect. Q1 results outperformed consensus by 1,750 bps versus the low set just ahead of peak season, topping out at just over 28.5% average earnings per share (EPS) growth, while Q2 results reflected acceleration, outperforming by 2,750 bps from the low to the high and peaking above 47%. With this in play, the Q3 consensus of 28.5% growth is a lowball estimate, likely to be surpassed and compounded by healthy guidance.

Oil Is Powering the Energy Sector's Earnings Surge

Oil has been a primary driver of outperformance. High oil prices are juicing energy company profits at all levels, with high prices aiding upstream operations and wide crack spreads and demand aiding downstream ops. The critical takeaway is that the energy sector, which grew EPS by 146% in Q2 and outperformed by 2,400 bps, is expected to remain strong in Q3 and potentially into Q4 and Q1 2027, underpinning market strength. The forecast for energy sector earnings growth is just over 100% for Q3.

AI Is the Real Story in Earnings This Year

As robust as the energy outlook is, AI is what's driving the S&P 500 today. The information technology sector's earnings were the second-fastest-growing in Q2. NVIDIA NASDAQ: NVDA underpinned the gains, along with a broad group of infrastructure companies and a widening group of software companies successfully monetizing the technology. The Q3 forecast is for another 62% growth; the revision trend is positive, and outperformance is likely to be substantial.

While NVIDIA is the primary driver, Advanced Micro Devices NASDAQ: AMD is unleashing another wave of GPU capacity. The MI450/Helios launch is expected to show strongly in Q3 results, including for AMD's ecosystem partners. Early signs, including from Hewlett Packard International NYSE: HPE (the primary source for Helios racks), show strength and momentum, with 42% new-order growth, backlog at record levels, and a pipeline suggesting exponential strength in upcoming quarters.

Software could come back into the spotlight in a good way. Q2 results from names such as Salesforce NASDAQ: CRM, Snowflake NASDAQ: SNOW, and a host of cybersecurity companies showed how misplaced the SaaS-pocalypse fears were. Salesforce, for one, reported explosive growth in its AI offerings, with clients flocking to its platform rather than abandoning it. Key details include its data moat, data-handling capacity, and agentic automation. Profits, cash flow, and capital return also help.

Earnings Season and Elections Could Break the Market’s Sideways Trend

Seasonal factors suggest the market will continue moving sideways, potentially correcting ahead of the upcoming earnings season. JPMorgan NYSE: JPM kicks off the peak season with a mid-October report, but momentum may not build until early November, after big tech begins reporting and Election Day results are in.

As it stands, community-based pushback against AI data centers is growing and delaying the buildout. Elections may come down to which candidates support data centers, although the build is likely to continue regardless of the outcome. The major hurdles are land, power, and water, with power and water more easily overcome. Companies such as Bloom Energy NYSE: BE and AirJoule NASDAQ: AIRJ provide hurdle-sidestepping technologies, and Bloom Energy, at least, is in high demand. AirJoule is waiting on UL product certification, which is anticipated soon.

Wall Street May Be Underestimating 2027 Earnings Growth

Another trigger for stock price action will be long-term forecasts and hints as to what 2027 will produce. Forecasts suggest another solid year but may be underestimating growth by a wide margin. Assuming the trends from the first half of the year remain in place, Q3 and Q4 will be strong, setting the stage for a solid first half of 2027, which analysts are not forecasting. Consensus as of early September suggests a good start, with Q1 2027 earnings expected to grow by nearly 18%, but a quick slowdown to nearly flat in Q2.

In this scenario, the market is on track for at least four more quarters of S&P 500 earnings growth, outperformance, and upward revisions to drive stock price action. With this in play, the index is likely to trend higher and could easily advance to 8,500 or higher by early 2027.

The biggest risk is the impact of oil prices on the earnings outlook—WTI is expected to revert to the $60 range sometime in 2027, which would cause a sharp slowdown in average growth.