Wall Street is heading into the third-quarter reporting season with an unusually strong earnings premise. FactSet expects S&P 500 earnings to grow 29.5% year over year in the third quarter of 2026, up from a 26.7% forecast at the beginning of the quarter. It projects 32.4% earnings growth for calendar 2026.
The more revealing detail is that the estimate has improved rather than merely remained elevated. Earnings expectations typically come down as a quarter progresses. This time, companies and analysts have moved in the other direction. That revision pattern gives the headline forecast more credibility than an optimistic estimate standing alone.
Yet 30% profit growth is not a simple verdict on the health of the whole index. Expected revenue growth is far lower, making margin expansion central to the calculation. Goldman Sachs Research also estimates that AI investment is tied to nearly half of S&P 500 earnings-per-share growth this year, while large technology companies have posted substantial unrealized gains on private-company investments. The market is not paying an obviously inflated multiple for those profits, but it is relying on their delivery and on the quality of the earnings underneath them.
Estimates are rising when they normally fall
FactSet’s third-quarter estimate rose 1.4% during the quarter. That contrasts with an average decline of 2.2% over the past five years and 2.5% over the past 10 years. Revisions matter because they reflect a changing assessment of what companies are likely to report, rather than simply the level of an initial forecast.
The improvement is also not confined to analyst models. Of 116 S&P 500 companies that issued third-quarter EPS guidance, 72 gave positive guidance. That is 62%, compared with five-year and 10-year averages of 42 and 40 companies, respectively. The guidance sample is not the entire index, but its direction is notably more favorable than the historical reference points.
This is the strongest part of the bullish earnings case. A 29.5% growth forecast can look vulnerable when it rests on a distant assumption; it looks more substantial when the estimate rises through the quarter and management guidance is unusually positive. The data do not guarantee reported results, and positive guidance does not establish that every sector is enjoying the same conditions. They do show that the consensus has not arrived at its forecast through the more familiar process of trimming expectations.
There is a further distinction worth keeping in view. The question for equities is not whether 29.5% is an impressive number in isolation. It is whether the forecast is sufficiently dependable to support the profits embedded in current valuations. On revisions and guidance, the evidence is constructive. On the composition of those profits, the case is more demanding.
A 12.3% sales gain cannot by itself explain 29.5% profit growth
FactSet forecasts third-quarter S&P 500 revenue growth of 12.3% and earnings growth of 29.5%, meaning earnings are expected to expand more than twice as fast as sales. Double-digit sales growth is a meaningful base for a strong quarter, but the gap identifies margin expansion as a major driver of the expected EPS increase.
The outlook therefore rests on more than demand: companies must convert a greater share of revenue into profit, alongside other factors captured in reported EPS. Margin delivery is the mechanism that turns the revenue forecast into the near-30% EPS outcome. For the index, stronger sales and wider margins are distinct contributors; persistent revenue growth provides a different foundation from earnings acceleration driven largely by margin expansion.
AI accounts for much of the earnings acceleration—and some of it is investment marks
Goldman Sachs Research estimates that nearly half of S&P 500 EPS growth in 2026 is tied to AI investment. The estimate makes AI central to the aggregate earnings story, not merely a technology-sector theme, and focuses attention on a single engine while the index’s expected growth rate is exceptionally high.
The same research highlights a qualification to the headline figures. Large technology companies recorded about $150 billion of unrealized private-company investment gains in the second quarter of 2026, an amount Goldman Sachs says was roughly equal to 12% of S&P 500 EPS. These gains are part of the reported earnings picture cited by the firm, but they are not the same thing as revenue growth or an improvement in underlying operating margins.
That does not make the earnings advance illusory. It does mean that the headline rate mixes operating performance with gains that arise from investments being marked higher. Readers assessing the index’s profit momentum should separate the two. An earnings stream powered by sales, margins and productivity has different implications from one that is also materially assisted by unrealized investment gains.
Goldman Sachs puts the recent pace in historical context: S&P 500 EPS grew 51% year over year in the second quarter and 26% over the preceding four quarters. Its cited 30-year average for four-quarter growth is 7%. Such a large gap from the long-run average makes the composition of growth especially important, because extraordinary rates need not persist for the earnings outlook to remain constructive.
The firm expects growth to decelerate rather than collapse as benefits from AI investment fade and productivity becomes more important. That is a consequential transition. AI-linked investment can continue to support the index while the pace of incremental earnings growth slows; the next test is whether productivity can take over as a more enduring source of profit expansion.
FactSet chart showing 72 S&P 500 companies issuing positive Q3 2026 EPS guidance, versus five-year and 10-year averages of 42 and 40. — Source: FactSet
At 19 times forward earnings, the market is betting on delivery rather than a richer multiple
The valuation backdrop is less extreme than the profit-growth numbers might imply. FactSet puts the S&P 500 forward 12-month price-to-earnings ratio at 19.0, below its five-year average of 19.8 and close to its 10-year average of 19.1. On those comparisons, the market is not chiefly depending on a further expansion of the index multiple to justify current levels.
Instead, earnings growth is doing much of the work. That is an important difference. A market valued far above its own recent norms would require investors to accept both strong profit delivery and a richer valuation. At 19 times forward earnings, the arithmetic is more closely tied to whether the forecast profits arrive.
It also explains why the present combination of high growth and near-average valuation can be rational without being uncomplicated. Rising estimates and broad positive guidance provide support for the forward earnings denominator. The revenue-to-profit gap, AI investment’s outsized contribution and the scale of unrealized investment gains all qualify how investors should judge that denominator’s durability.
The 29.5% third-quarter forecast is therefore enough to support a 19-times-forward-earnings market if companies deliver it. But the investment case becomes less about whether the number is large enough and more about what remains when the unusually powerful AI-investment effects and private-company investment marks no longer contribute at the same pace. Goldman Sachs expects deceleration, not collapse, as productivity assumes a larger role—a distinction that will matter more than the headline growth rate alone.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
Source: Crypto Daily