The Q2 earnings reporting season for the S&P 500 NYSEARCA: SPY is wrapped up, and the results are better than expected. The S&P 500 closed out the cycle with approximately 12% year-over-year (YOY) earnings growth, and more is expected in Q3.
As it stands in early September, the consensus forecast is for roughly 7.5% YOY earnings growth from the index in Q3, and far stronger results are likely. Not only has the index outperformed consensus historically, but the Q2 margin of error was wider than usual.
The index’s 12% increase is 700 basis points above the consensus estimate at the low point in its cycle, significant enough by itself, and several hundred basis points above average, all due to tariff and trade fears. The takeaway is that the trend driving the S&P 500 remains in place and is likely to drive it higher before the year's end.

Expect Strength From the Consumer in Q3
Tariffs and trade fears are not without reason. Tariffs are impacting the economy, but the takeaway from Q2 is that the impact is not as bad as feared. Assuming this trend continues and that all tariffs remain in place, the 7.5% earnings growth forecasted for Q3 could quickly turn into 12% or 15% and become an even more potent catalyst for the market. Likewise, an improving outlook for Q4 is also likely to strengthen the uptrend in the index.
Among the drivers for the index strength was the consumer, which is expected to lag in Q3. The estimates indicate that the Consumer Staples Select Sector SPDR Fund NYSEARCA: XLP and Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY are in contraction compared to last year, setting the market up for a good surprise.
The latest consumer data includes the jobless claims and retail sales figures, which reflect a healthy labor market and a resilient consumer. The July retail sales figures, specifically, showed significant consumer momentum with a 0.5% monthly increase, a 3.9% YOY increase and a substantial 30 basis point upward revision to the prior month.

The charts for both sectors are suggestive. The XLY is in rebound mode and on track to hit fresh highs soon, while volume has been increasing for the XLP. The staples sector is rangebound in 2025, but the increased volume suggests increasingly bullish sentiment and potential for its uptrend to continue.
Expect Tech and AI to Lead the S&P 500 in Q3
Results from NVIDIA NASDAQ: NVDA, Snowflake NYSE: SNOW, and MongoDB NASDAQ: MDB were much stronger than expected, affirming that the AI bubble is still growing without an end in sight. They also affirmed that spending is expanding beyond hardware and infrastructure to include software development and applications, which will eventually become a much larger industry.
The Technology Select Sector SPDR Fund NYSEARCA: XLK is expected to lead the broader market in Q3, producing nearly 20% in YOY earnings growth, and the estimates are rising. Leaders will include NVIDIA, but expect strength from Advanced Micro Devices NASDAQ: AMD as well as AI infrastructure, business services and automation companies, as well as outperformance from the group relative to September and October estimates.

The S&P 500 Technology SPDR, which is more than 15% NVIDIA and nearly 30% including Microsoft NASDAQ: MSFT, is trending higher long-term and in 2025 after rebounding strongly from the April lows. The uptrend will likely continue following the Q3 reporting season due to the strength of AI spending trends, but it will pull back to retest support before the cycle starts is the question. The first big tech names, including Microsoft, will not report until late October, providing ample opportunity for a market correction.
The FOMC Poses a Risk to the Market
The FOMC is among the risks to the market, but one that may not matter in the long term. The risk is that the committee will not cut rates as soon or as quickly as the market is pricing in because inflation is still hot, and labor markets are resilient. The best-case scenario is a one-and-done event later this year, unless there is a recession, which isn’t good for stocks. In this scenario, any boost expected from lower rates, specifically in housing markets, will be incremental.
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