3Q Reporting Season in Full Swing
Earnings remain strong and AI capital expenditures are surging, but rising risks and rich valuations are testing the market's ability to sustain profits.
Despite stretched valuations at the top end of the market and the ongoing AI investment cycle, the income statement remains resilient. The reporting season has two key messages:
- Weak earnings are the number one risk, but forward profits are rising, which tends to increase markets.
- Earnings look good, with 2025 numbers holding up and 2026 estimates ticking higher again after an earlier wobble.
Q3 estimates are being revised up, and Q4 estimates are holding firm. Earlier this month, there were pockets of pain in auto insurance, and Jamie Dimon warned that
where there is one cockroach, there are often more. However, financials were the largest positive contributor to growth, driven by booming trading, capital markets, and decent wealth and insurance results. Detractors include energy, communication services (excluding mega caps), and healthcare.
Author's summary: Earnings stay strong despite rising risks.
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