By: Aaron Wall, CFA
Partner, Portfolio Manager
It’s hard to believe, but Q3 earnings season starts next week with bank earnings. Per FactSet’s Earnings Insights team, projections for the year-over-year growth rate in Q3 stand at 29.5%. If this plays out, it will mark the third-straight quarter of earnings growth exceeding 25% for the S&P 500.
With significant changes in global energy prices and monetary policy since the start of the year, earnings have without a doubt played an important role in propelling equity markets to new all-time highs. That said, let’s dig into a few important earnings components.
Forward P/E Ratio
One key valuation metric for the market is the forward price-to-earnings (P/E) ratio. This takes the current price of the overall index and divides it by the earnings expectation for the next 12 months.Measured as of last week, the forward P/E ratio was 19. FactSet points out that this is actually below the 5- and 10-year averages of 19.8 and 19.1, respectively. This metric has also decreased since the end of Q2, when it stood at 20.4.
Decreases in this valuation metric because of increased earnings are no doubt a signal of strength in corporate earnings. This does, however, continue to fuel the idea that the bar for earnings is gradually moving higher. The forward P/E ratio will be a key metric to follow as Q3 earnings season gets underway.
The Market Breadth Of Earnings Growth
It will also be important to follow the breakdown of where the earnings growth is coming from. Goldman Sachs estimates that just two companies, Micron and Nvidia, could make up more than one-third of the entire S&P 500’s Q3 earnings expansion.All 11 sectors of the index are expected to report earnings growth, and it will be important to see earnings expanded across the entire index. The market is preemptively pricing in this outcome.
Over the last few weeks, the breadth of the market has weakened. Market breadth can be measured a few different ways, but the goal is to understand how the aggregate of all 500 stocks is contributing to outperformance.
Strategas Research Partners highlights that, as of this Tuesday, only 46% of S&P 500 stocks were above their 200-day moving average. This can be interpreted as the market sending a signal that it’s looking for follow-through on earnings from most of the index in Q3.
Asking a few bellwether stocks to drive the overall index is a familiar story from the last few years. However, as the market consolidates around its all-time highs, we would like to see broader participation to create the necessary momentum for markets to push higher.
It seems clear to us that the market is pricing for this potential opportunity, and it will be on the earnings reports to drive stocks higher.
Net Profit Margins
One more area that we are watching closely is net profit margins, which have seen resilient growth and been another signal of broader strength in the market. In Q2 of 2026, net profit margins stood at 17%, drastically higher than Q2 of 2025, when they were 12.9%.This sustained increase in margins will be hard to maintain over a long period, but it can continue to aid the bull case for the time being. We’ll be watching the net profit margin results for Q3, and this will be an important input for the story moving forward.
