Q3 Earnings Could Be the Catalyst the Market Has Been Waiting For

Q3 earnings season, starting in October, is expected to again beat a lowball consensus of 28.5% growth after Q1 and Q2 results far exceeded estimates. Energy and technology sectors, fueled by high oil prices and AI-related spending from companies like NVIDIA and AMD, are driving much of the earnings outperformance. Analysts may be underestimating 2027 earnings growth, with the S&P 500 potentially advancing to 8,500 or higher, though falling oil prices pose a key risk.

Q3 earnings reporting, which kicks off in October, looks set to be another solid season for the market. While factors including geopolitics, oil, inflation, and the FOMC point to volatility, earnings trends and seasonal trends suggest a robust rally will follow. Seasonally, Q4 is typically the strongest of the year, often starting off slow and then ending with a bang, usually capped off by a Santa Claus Rally. This year, the stage is set for significant outperformance and an affirmation of next year’s results that may lead to a substantial market reset.

The S&P 500 historically outperforms its consensus estimates, but outperformance tends to run in the low-single-digit range. Today's narrative is that Q1 and Q2 results were so far above consensus that they revealed a major market disconnect. Q1 results outperformed consensus by 1,750 bps versus the low set just ahead of peak season, topping out at just over 28.5% average earnings per share (EPS) growth, while Q2 results reflected acceleration, outperforming by 2,750 bps from the low to the high and peaking above 47%. With this in play, the Q3 consensus of 28.5% growth is a lowball estimate, likely to be surpassed and compounded by healthy guidance.

Oil has been a primary driver of outperformance. High oil prices are juicing energy company profits at all levels, with high prices aiding upstream operations and wide crack spreads and demand aiding downstream ops. The critical takeaway is that the energy sector, which grew EPS by 146% in Q2 and outperformed by 2,400 bps, is expected to remain strong in Q3 and potentially into Q4 and Q1 2027, underpinning market strength. The forecast for energy sector earnings growth is just over 100% for Q3.

As robust as the energy outlook is, AI is what's driving the S&P 500 today. The information technology sector's earnings were the second-fastest-growing in Q2. NVIDIA NASDAQ: NVDA underpinned the gains, along with a broad group of infrastructure companies and a widening group of software companies successfully monetizing the technology. The Q3 forecast is for another 62% growth; the revision trend is positive, and outperformance is likely to be substantial. While NVIDIA is the primary driver, Advanced Micro Devices NASDAQ: AMD is unleashing another wave of GPU capacity. The MI450/Helios launch is expected to show strongly in Q3 results, including for AMD's ecosystem partners. Early signs, including from Hewlett Packard International NYSE: HPE (the primary source for Helios racks), show strength and momentum, with 42% new-order growth, backlog at record levels, and a pipeline suggesting exponential strength in upcoming quarters. Software could come back into the spotlight in a good way. Q2 results from names such as Salesforce NASDAQ: CRM, Snowflake NASDAQ: SNOW, and a host of cybersecurity companies showed how misplaced the SaaS-pocalypse fears were. Salesforce, for one, reported explosive growth in its AI offerings, with clients flocking to its platform rather than abandoning it. Key details include its data moat, data-handling capacity, and agentic autom...