Investors focus attention on corporate earnings

Fourth-quarter earnings results delivered a clear message that many large U.S. companies continue to grow profits faster than analysts expected. With 98% of S&P 500 companies reporting, revenues and earnings grew 9.2% and 13.6%, respectively, well above the initial 7.9% growth forecast. ¹ Those results helped support stock prices at a time when many investors already viewed valuations as elevated.

“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.” Investors will continue to test that view as more companies discuss pricing power, wages, and demand trends in 2026.

Earnings season also showed that results can stay strong even when the market reacts sharply to headlines. Volatility rose as investors weighed rapid capital spending, uneven visibility into future profits, ongoing debate about how artificial intelligence may reshape business models, and the recent Middle East conflict. Even so, the overall earnings picture improved as the season progressed, with profit growth consistently running above the early forecasts.

Consumer strength helps, but spending appears uneven

Company commentary pointed to a consumer that is still spending, especially in middle- and higher-income households. Airlines, banks, and credit card companies described healthy demand and generally stable credit quality, which supported revenues for many consumer-facing businesses. At the same time, multiple updates described a more cautious tone among lower-income households, with spending decisions leaning toward value, convenience, and select “must-have” purchases.

Late-year updates also suggested the holiday season required more careful reading than a single headline. Some retailers and restaurant operators described resilient but cautious consumer behavior, including traffic gains among higher-income guests and softer activity among households earning under $50,000. That split matters for 2026 because it can shape which industries sustain revenue growth and which ones face more pressure on volumes or pricing.

Business investment is strong, with AI spending under a brighter spotlight

Corporate investment remained a major theme, and technology spending stayed robust even as investors raised the bar for proof of profitability. Several updates described accelerating capital spending with limited visibility into near-term returns, which contributed to sharp price swings in parts of the market. Investors increasingly treated “how much are you spending” and “when does it pay off” as core earnings questions, not side issues.

That scrutiny showed up most clearly in the scale of spending plans tied to artificial intelligence (AI) infrastructure. Large cloud providers are projecting roughly $650 billion of 2026 capital investment compared with about $410 billion in 2025, much of it aimed at computing infrastructure (hardware and operating systems) and data centers. ² The market’s reaction suggests investors want a clearer line from that spending to future profits, and that uncertainty can increase volatility even when earnings growth remains strong.

Software: AI is raising the bar for subscription business models

Software drew unusual attention this earnings season because investors increasingly believe new AI tools can replicate parts of what subscription software packages do. Recent product releases, including new AI plugins for contract analysis, document generation, and other specialized tasks, amplified concerns about pricing power and switching costs. When prices already assume a lot of future success, headlines like these can trigger a “sell first, analyze later” move as investors reassess the payoff timeline.

Disruption is more likely to be selective than universal, because many organizations still require trusted data, security, governance, and compliance guardrails before they scale new tools across mission‑critical workflows. “Remember what software is. Software is a tool. There’s this notion that the tool – the software industry – is in decline and will be replaced by AI…It is the most illogical thing in the world, and time will prove itself,” said Jensen Huang, CEO, NVIDIA. ³

Earnings expectations for 2026 rise as policy and fundamentals improve

Investors used earnings season to update expectations for the year ahead, and estimates moved higher as the year progressed. For example, 2026 S&P 500 earnings estimates rose from $297 in early July 2025 to $313 as of March 4, 2026. ¹ Those rising expectations reflect improving confidence in business fundamentals alongside a policy backdrop that investors viewed as increasingly supportive.

Bill Merz, head of capital markets research for U.S. Bank Asset Management Group, says sentiment improved as supportive catalysts arrived, including July’s One Big Beautiful Bill Act legislation and the Federal Reserve's three quarter-point cuts in September, October, and December. Strong fourth-quarter results reinforced that confidence and helped keep earnings expectations moving higher. Markets have generally priced one to two additional quarter-point cuts in 2026. ⁴

Valuation adjustments

The S&P 500’s projected price-to-earnings (P/E) ratio, an important valuation measure, remains above its five-year and ten-year averages. ¹ “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 rich by historical measures, companies can’t afford earnings stumbles, and so far, they’ve hit the mark.”

Valuation support can weaken quickly if inflation re-accelerates, especially through higher energy costs. “Inflation is kryptonite to stock valuations,” says Sandven. “If energy prices rise and the price of other goods follow, this might force the Federal Reserve to raise interest rates, which could temper corporate earnings.” That is why investors have watched the U.S.-Israel/Iran conflict closely, since rising oil prices can lift inflation expectations and change the interest-rate outlook.

Market performance: Leadership broadened, then rotated

Market returns show how leadership has shifted across regions, company sizes, and sectors. In 2025, foreign developed and foreign emerging equities led returns, while U.S. mid-cap and small-cap stocks also posted gains alongside the S&P 500. In early 2026, performance has looked more rotational, with U.S. mid-cap and small-cap equities and foreign emerging equities holding up better than the broad U.S. large-cap index. ¹

Sector returns tell a similar story as 2025 gains extended beyond a narrow set of winners, but leadership still leaned toward technology-adjacent areas like communication services and technology stocks. In early 2026, leadership rotated, with energy and materials leading while information technology and consumer discretionary have lagged. ¹This kind of rotation can feel noisy in the moment, but it may also signal that investors are weighing growth, inflation, and earnings durability across a wider set of industries rather than relying on a single theme.

How to use this earnings update in a portfolio decision

Corporate earnings tend to matter most over longer periods because profits help drive long-term stock market returns. Near-term market moves can still react quickly to interest rates, inflation, and shifting headlines, which can make returns feel unpredictable from month to month. A disciplined approach that matches investments to goals and time horizon can help investors stay focused when the market rotates between optimism and concern.

Many investors can use earnings season as a practical check-in rather than a trigger 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, even as 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.