Q3 Earnings Season Preview: Little Suspense

We believe corporate America will follow up an outstanding second quarter earnings season with another good one in the third quarter. Support from a resilient economy, tariff mitigation measures, artificial intelligence (AI) investment, and currency should offset increasing tariff costs. With much of investors’ collective attention focused on the duration and economic impact of the government shutdown, and how to assess the outlook for the U.S. economy in the absence of government data, writing about something else this week is a nice diversion.
Don’t Expect Much Suspense This Quarter
Earnings season is usually predictable quarter to quarter in the absence of economic inflection points. We would suggest the second quarter was more of an inflection point than the third as tariffs ramped up in a meaningful way and companies’ visibility into tariff costs improved. The effective tariff rate ended July at 9.7%, up slightly from below 9% at the end of June (source: Bloomberg). We think another three to five points of tariffs will likely be added on to July levels to land at an overall rate between 12% to 14%, but the Supreme Court will determine how quickly we get there. The nation’s highest court is expected to rule on the legality of the Trump administration’s tariffs imposed under the International Economic Emergency Powers Act (IEEPA) within the next few months.
So, with less suspense around tariffs, economic growth that could approach 3% for Q3, the continued surge in artificial intelligence (AI) investment, and a roughly 5% drop in the average level of the U.S. dollar from the prior-year quarter, corporate America has an excellent opportunity to post another low-teens earnings growth rate for the S&P 500. The 8% upside produced last quarter may be too much to ask for, but a 5% beat seems like a reasonable expectation.
Artificial ligence Capital Investment Remains the Dominant Driver
The Magnificent Seven will again be a significant driver of earnings growth in the third quarter. In fact, 70% of the 8% expected S&P 500 earnings growth reflected in analysts’ estimates is coming from the biggest six technology companies (the Magnificent Seven minus Tesla). It’s remarkable that companies this big can grow earnings 40–50% — but several hundred billion in capital spending annually will do that!
As shown in the “Magnificent Seven Remains a Powerful Earnings Driver” chart, this group continues to dominate the earnings growth of the rest of the companies in the index. While this trend will likely continue through year-end, it is expected to narrow next year as the S&P 493 (the S&P 500 excluding the Magnificent Seven) plays some catch-up.
This earnings growth gap is still big right now and underpins out continued preference for large growth equities over their large value counterparts. But, as the gap narrows in 2026, we would expect this bull market to broaden out. Cyclical value stocks may get some additional support from the fiscal stimulus provided by the One Big Beautiful Bill Act (OBBBA). Our positive view of financials fits this theme, but industrials are another potential beneficiary.
Margin Outlook: Where Are Tariff Effects?
Tariff effects were expected to show up in second quarter earnings reported in July and August. Well, they certainly showed up for some global industries, such as automakers, industrial equipment makers, and apparel retailers. But at the macro level, the effects have been much less than we, and most analysts, anticipated. There are a lot of reasons for this, including:
Some tariffs haven’t gone into effect yet.
Some service industries are largely unaffected.
AI-driven productivity enhancements are starting to show up, supporting profit margins, while most AI companies have moderate tariff exposure.
Several key companies have struck side deals by committing to investing in the U.S. or furthering other Trump administration objectives. , Intel, , and are among the biggest names.
Most imports from Canada and Mexico are subject to lower tariffs under the USMCA trade agreement.
Tariff costs have been spread out among exporters, importers, and consumers, reducing the hit to profit margins.
More margin pressure is likely coming as more of these tariffs flow through in the next few months. However, based on analysts’ earnings estimates, Wall Street sure isn’t worried. The “Corporate America Managing Large — But Lesser — Tariff Burden Very Well” chart reflects expectations that margins will continue to expand. Given the recent track record, we won’t bet against corporate America expanding margins, though we do not expect quite as much expansion as is reflected in analysts’ consensus estimates.
Reasons For Optimism on Earnings In 2026
We anticipate corporate America to benefit from steady economic growth next year, supporting solid earnings growth. Fiscal stimulus from the OBBBA is expected to jump-start growth after a late 2025 slowdown. We expect companies to continue to manage tariffs effectively. The dollars going into the AI investment surge are only going to get bigger next year, driving strong technology sector earnings gains. And another year means companies will have more time to generate productivity gains from AI, supporting margins. The recent increase in earnings estimates is encouraging.
Finally, share buybacks are expected to maintain or exceed their record pace set this year, depressing the denominator in the earnings per share (EPS) calculation and lifting EPS.
Put all that together and a 10% increase in S&P 500 profits in 2026 is a real possibility. That puts $290 per share in play for index EPS next year, compared to the $280-plus range we cited in our second quarter earnings recap commentary. While a higher price-to-earnings ratio would be a tough ask, earnings may do the work for us and keep this bull market well supported through 2026.
Conclusion
In our view, we believe corporate America should continue to deliver solid earnings growth in the third quarter with few surprises. Given the solid economic backdrop, resilient earnings estimate trends, the tailwind of AI capital investment, and a weak U.S. dollar, it’s very likely earnings will deliver another 5–7% upside to current consensus estimates and grow earnings at a low-teens pace in Q3. It won’t be easy, however, because companies had to absorb more tariff costs last quarter compared with Q2.
Looking ahead, the combination of AI investment, tech-driven productivity gains, and supportive fiscal policy could potentially enable earnings to grow at a double-digit clip in 2026 and keep this bull market well supported.