To The Moon

Third-quarter earnings season is about to kick off. With the major indexes hovering near record highs, Wall Street is watching October’s reports more nervously than usual—option-skew data remind us that earnings-related swings are historically largest in October.

A quick rewind to Q2: profit growth was dazzling. S&P 500 EPS rose 9.3 % y/y, a third straight positive quarter and the fastest pace since 2022, according to FactSet. Revenues advanced 5.8 % despite tariff noise and sticky inflation; 79 % of companies beat bottom-line estimates. AI-related cap-ex and booming cloud demand powered the mega-caps, and the “Magnificent 7” grew earnings far faster than the rest of the market, leaving concentration near record levels.

Banks bounced thanks to stable net-interest margins and healthy fee income, while industrials rode a steady capex cycle. Headwinds hit staples (tariffs), energy (lower commodity prices), rate-sensitive REITs & utilities (higher funding costs), and big pharma (patent cliffs, pricing pressure). The strong print, plus rich multiples, pushed analysts to lift full-year 2025 EPS growth to +10.8 %—setting a high bar for Q3.

Third-quarter outlook: higher expectations, higher risk

Consensus now expects S&P 500 EPS to grow 7.9 % y/y, up from 7.3 % at the start of the quarter, with sales +6.3 %. The upward revision is an explicit bullish signal, but valuation leaves no margin for disappointment: the index trades at 22.5× forward earnings, above both five- and ten-year averages. Investors will laser-focus on gross-margin trends and Q4 guidance; companies must prove they still have pricing power or cost-control credibility to justify the multiple.

Financials—reporting mid-October—are forecast to post 11 % EPS growth against a fresh Fed rate-cut backdrop. Key watch-points: NIM trajectory, credit-quality metrics, and investment-banking revenues.

Tech remains the EPS expansion engine, with aggregate earnings seen up ~21 %. Semiconductors and AI infrastructure lead; the Mag-7 alone supply more than 25 % of index profits. After a blow-out Q2, questions center on AI monetization, margin sustainability, and cloud re-acceleration.

Goldman Sachs argues Street numbers are still too low, citing resilient macro data, corporate adaptability, and continued AI cap-ex. BlackRock notes that Q2 strength was broad-based beyond mega-caps; if infrastructure & capex stay firm, utilities and materials—buoyed by favorable pricing and volume—could rank among the fastest-growing sectors this quarter.