Tying a Bow on Third Quarter Earnings

Third-quarter results were strong, even as the broader economy showed signs of slowing. With 95% of the S&P 500 reporting, 82% beat earnings expectations and 66% topped sales forecasts. The blended year-over-year earnings growth rate now stands at 13.4%, marking the fourth straight quarter of double-digit growth and the ninth consecutive quarter of overall earnings expansion—a clear sign of U.S. corporate resilience. 

Despite the positive results, markets have been stingy with rewards for positive surprises while harshly punishing misses. That’s typical in late cycles, especially with valuations still high. 

In terms of earnings growth, financials, information technology, and consumer discretionary led while communication services lagged, weighed down by Meta’s disappointing results. The communications services sector had the widest gap between estimates and actual earnings but, interestingly, led in revenue growth. 

The “Magnificent 7” remain key drivers, posting 18.4% earnings growth, ahead of the index but below their recent trend. Looking ahead, consensus expects about 21% growth over the next four quarters. 

Valuations have eased slightly but remain elevated, with the forward P/E at 21.5x, above historical averages. For 4Q25, analysts forecast 7.5% earnings growth, signaling a softer but still healthy finish to the year. 

The bottom line 

In this environment, we continue to favor high-quality companies with durable pricing power and operational flexibility. 

Source: Bloomberg, FactSet.  

Sebastian Teper contributed to this article.