Investors focus attention on corporate earnings

Third-quarter earnings season unofficially began October 13 with expectations running high. Consensus estimates compiled by FactSet call for S&P 500 revenue to rise 11.9% from a year earlier and earnings to increase 23.1%. ¹ Major banks were among the earliest companies scheduled to report, offering an initial look at consumer and business spending, loan demand, credit quality, and the effect of higher interest rates.

These corporate reports provide several tests of the economic and market outlook. Bank results can show whether households and businesses continue borrowing and whether missed payments or loan losses are increasing. Reports from technology, industrial, and consumer companies add evidence on artificial intelligence (AI) investment, operating costs, demand, and companies’ financial projections for late 2026 and 2027.

Second-quarter corporate earnings exceeded expectations

Second-quarter results established a strong starting point for third-quarter earnings season. S&P 500 companies reported year-over-year sales growth of approximately 15% and earnings growth of approximately 53%, with profit gains extending across multiple sectors. ² The earnings figure includes items that may not reflect ongoing operations, but broad gains and strong margins still point to healthy underlying business performance.

Consumer spending and business investment supported those results. Companies reported resilient spending on travel and other experiences, generally healthy credit quality, and continued investment in technology, artificial intelligence infrastructure, and equipment. Third-quarter reports will show whether those trends persisted as companies encountered higher oil prices and borrowing costs, with revenue growth, margins, and financial projections providing a clearer measure than headline earnings alone.

Corporate earnings test the strength of consumer spending

Consumer spending remains an important source of company revenue, but conditions vary widely among households. Higher-income consumers continue to support travel, dining, premium goods, and other experiences, while middle-income households remain active but increasingly selective. Lower-income households face greater financial pressure, although current data do not show widespread deterioration in credit quality.

Company commentary suggests shoppers increasingly favor products and services that offer value, convenience, or a clear benefit. Spending on experiences remains resilient, while housing activity and many large discretionary purchases are subdued under the weight of elevated borrowing costs. Holiday sales forecasts, transaction volumes, and management commentary will provide investors with evidence of whether consumer demand can sustain corporate revenue growth through year-end.

“The equity market is still trending higher. That goes back to healthy fundamentals,” says Terry Sandven, chief equity strategist for U.S. Bank Asset Management Group. “Most importantly, consumer and corporate technology spending both remain strong, corporate margins are robust, and inflation doesn’t appear problematic.” Third-quarter results will test that assessment as companies discuss demand, wages, pricing, and credit conditions.

Company earnings depend on revenue growth and profit margins

Consumer spending is only one link in the earnings outlook. Business investment in technology, equipment, manufacturing capacity, and infrastructure create revenue for companies throughout the supply chain. Bank lending and access to capital help finance that activity, while operating margins determine how much revenue ultimately becomes profit.

Corporate margins remain high by historical standards, allowing many companies to absorb higher wages, financing costs, and other operating expenses. Strong revenue growth can produce even faster earnings growth when companies hold costs below the rate of sales growth. Companies can also increase sales and still disappoint investors if rising expenses consume too much of that revenue.

This relationship explains why investors examine more than whether a company exceeded a quarterly earnings estimate. They also study revenue growth, margins, and financial projections to determine whether the result reflects durable business improvement or temporary influences. Separating ongoing operating performance from one-time gains or expenses provides a clearer view of a company’s underlying earnings power.

Artificial intelligence investment faces a profitability test

Artificial intelligence remains a major source of business investment and company earnings growth. Large technology companies are spending heavily on data centers, semiconductors, memory, networking equipment, and cloud computing capacity. That investment also supports power producers, utilities, industrial companies, financial firms, and other businesses supplying or financing the physical infrastructure behind AI.

The next phase increasingly depends on adoption and profitability rather than construction alone. Investors want evidence that companies can use AI to increase productivity, improve customer experiences, lower costs, or create new sources of revenue. Infrastructure demand remains strong, but enterprise adoption and measurable financial returns have developed more gradually, raising the standard management teams must meet when explaining future spending.

Financing also deserves attention as technology companies become more capital intensive. Companies that once generated cash well above their investment needs may devote more cash to infrastructure or issue debt, potentially leaving less available for dividends and share repurchases. Greater borrowing can increase sensitivity to interest rates and business conditions, creating more separation between companies that convert AI spending into profitable growth and those that do not.

Earnings growth supports elevated stock valuations

Earnings growth, rather than rising valuation multiples, has driven much of the stock market’s advance. A price-to-earnings ratio compares a stock’s price with the profit investors expect the company to generate, providing one way to assess how much investors are paying for those earnings. Higher interest rates make bonds more competitive with stocks and can reduce the price investors will pay for profits expected far into the future.

Consensus estimates call for S&P 500 earnings growth of approximately 32% in 2026 and 16% in 2027. ² The index trades at roughly 21 times projected 2026 earnings and 19 times projected 2027 earnings. ² Those ratios remain above historical averages, leaving less room for companies to miss expectations even though valuations remain below prior market-cycle peaks.

“Sustained earnings growth is crucial for supporting these valuations,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. “With valuations elevated by historical measures, companies can’t afford earnings stumbles, and so far, they’ve hit the mark.” Strong quarterly earnings can reinforce that support, while weaker revenue, margins, or financial projections could expose companies whose stock prices already assume substantial future growth.

Inflation and interest rates raise the hurdle for corporate profits

Higher oil prices present a direct earnings risk for airlines, transportation companies, manufacturers, and other energy-intensive businesses. Delta Air Lines provided an early example by reporting resilient travel demand and strong premium revenue growth while higher fuel costs pressured earnings and prompted management to reduce its 2026 guidance. That combination points to fuel inflation, rather than weak travel demand, as the more immediate concern for many companies.

Energy costs can also affect profits indirectly by lifting transportation and production expenses across the economy. A broader increase in inflation could keep interest rates elevated or lead the Federal Reserve to tighten policy further, raising financing costs and placing additional pressure on stock valuations. The size and duration of the effect will depend on whether higher energy prices spread to other goods and services or remain concentrated.

“Inflation is kryptonite to stock valuations,” says Terry Sandven. “If energy prices rise and the prices of other goods follow, this might force additional Federal Reserve interest rate increases, which could temper corporate earnings.” Investors are closely examining how management teams discuss fuel, freight, wages, borrowing costs, and their ability to raise prices without weakening demand.

Broader market participation strengthens the earnings outlook

As of October 9, major broad-market indexes had gained between 8.8% and 24.1% in 2026, led by emerging-market stocks, while nine of the 11 S&P 500 sectors had produced positive returns. ² Six sectors had gained at least 10%.² The breadth of those gains shows that economic and earnings strength has supported a wider range of companies.

The breadth of earnings growth provides another test of the market’s durability. Technology remains a major contributor, but improving profits across other sectors, company sizes, and international markets would reduce the market’s dependence on its largest companies. Market leadership broadened overall during 2026, although intermittent periods of concentration show why investors continue monitoring whether revenue and profit growth expand along with stock market participation.

Broader participation does not eliminate market risk, particularly while interest rates remain elevated. It does indicate that the earnings outlook reflects more than enthusiasm for a single theme. Consumer spending, bank lending, business investment, healthy margins, and AI-related capital expenditures continue to reinforce one another across the economy.

How investors can use corporate earnings in portfolio decisions

Quarterly earnings provide a useful check on the assumptions supporting markets, but one reporting season rarely justifies sweeping portfolio changes. Investors can compare results and financial projections with expectations for consumer demand, business investment, margins, inflation, and interest rates. Deterioration across several of these indicators would carry more weight than an isolated disappointment from one company or sector.

Diversification can reduce dependence on any single company, industry, or investment theme. AI-related growth increasingly reaches across technology, communication services, industrials, power, utilities, financial services, and selected healthcare companies, while international and smaller-company stocks provide additional sources of earnings exposure. Bonds also offer more attractive income than they did through much of the past decade, giving investors another way to balance growth objectives and portfolio risk.

Investors can use earnings season as a practical check-in rather than a reason for sudden changes. As you assess your investment options and how to best position your portfolio, consider doing so within a financial plan. Talk with your wealth professional to review whether changes to your investment strategy may be warranted to better reflect your goals, risk appetite, and time horizon. A plan can help you stay disciplined when markets swing, while earnings continue to do the steady work of compounding over time.

FAQs

How are company earnings calculated?

Companies start with the revenue they generate over a period, usually a quarter, and then subtract the costs required to run the business. Those costs can include what it takes to produce goods or deliver services, day-to-day operating expenses, interest on debt, and taxes. What remains is net income, which investors often call earnings because it shows how efficiently a company turns sales into profit.

Are corporate earnings the same as profit?

In most cases, yes, because “earnings,” “net income,” and “the bottom line” usually describe the same idea. People sometimes discuss other profit measures, such as operating profit or gross profit, which focus on different parts of the income statement. Still, when market commentary discusses corporate earnings, it typically refers to the profit left after a company pays all of its expenses.

What’s more important, earnings or revenue?

Both matter because they answer different questions, and investors often use them together to understand a company’s health. Revenue shows how much a company sells, while earnings show how much of those sales the company keeps after paying its bills. A company can post strong sales growth, but if costs rise faster than sales, earnings may disappoint, and markets often react to that difference.