Our market perspective is supported by stable household spending and continued health across business fundamentals.
To that end, 3rd quarter earnings season is off to an active start, with about 24% of S&P 500 companies reporting so far. Corporate results remain solid, as 83% of reporting firms have exceeded earnings estimates and 66% have topped revenue projections, bringing blended annual earnings growth to 30% and revenue growth to 13%. Profitability also remains sound across most sectors, with net profit margins currently standing at 15%. Valuations remain reasonable with the forward 12-month price-to-earnings (P/E) ratio sitting at 19x, slightly below its 5-year and 10-year averages.1
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The prior week marked another shift in market leadership as investors continued to reassess some of the year's strongest-performing areas. Earnings season gained momentum and offered fresh insight into business conditions, the outlook for artificial intelligence-related investment, and the broader economy.
Markets produced mixed results, with weakness concentrated primarily in portions of the technology sector that have driven much of this year's advance. At the same time, several other areas of the market demonstrated resilience, suggesting recent volatility may reflect changing investor preferences rather than a meaningful deterioration in underlying fundamentals.
Earnings Season Moved to the Forefront
With relatively few major economic releases during the week, corporate earnings and management guidance took center stage.
A common theme emerged across several industries, particularly within technology and artificial intelligence-related businesses. Demand for AI infrastructure and digital technologies remains strong, but investors are asking increasingly important questions about the cost of that growth. Companies are investing substantial amounts of capital to expand computing capacity, build data centers, and support future demand, leaving investors more focused on profitability and return on investment than they were earlier in the year.
So far, earnings season has been less about widespread weakness and more about elevated expectations. In several cases, solid results were met with muted market reactions as investors looked beyond headline numbers and focused on future margins, spending plans, and long-term earnings potential.
As reporting season continues, management commentary may ultimately matter more than earnings themselves. Guidance on capital expenditures, hiring plans, pricing power, and business conditions heading into 2027 will likely shape investor sentiment.
Leadership Continued to Broaden
Beneath the headline index performance, leadership continued to shift across sectors.
Technology and AI-related stocks have been among the strongest performers throughout 2026. More recently, however, investments have begun flowing into areas that have received far less attention during the year, including financials, healthcare, and other value-oriented sectors.
Rotations like this can create short-term volatility, but they are often a healthy feature of advancing markets. After a strong run in growth-oriented sectors, it is not unusual to see investors lock in gains and reallocate capital toward areas with lower valuations or improving earnings prospects.
Importantly, recent weakness has been concentrated primarily in sectors that generated some of the strongest returns earlier in the year. That distinction matters. A rotation within the market is very different from a broad-based deterioration across the market.
If participation continues to broaden, the market may become less dependent on a relatively small group of large technology companies to drive returns. Over time, that could provide a more durable foundation for future gains.
The Economic Backdrop Remained Steady
Although last week's economic calendar was relatively light, the available data continued to point toward an economy that remains on solid footing.
Initial jobless claims declined to a three-month low, suggesting labor-market conditions remain healthy. Meanwhile, business activity surveys continued to indicate economic expansion even as some companies reported ongoing pricing pressures.
Housing remains one of the softer areas of the economy as elevated mortgage rates continue to weigh on activity. Even so, broader measures of economic activity have remained surprisingly resilient despite higher interest rates and tighter financial conditions.
Treasury yields also moved modestly lower during the week, with the yield on the 10-year U.S. Treasury falling below 5% after reaching multi-decade highs earlier this month. While rates remain elevated, the recent stabilization has eased one of the more significant headwinds investors were confronting just a few weeks ago.
Our Perspective
Last week's market action had more to do with changing preferences than changing fundamentals.
As earnings season progresses, markets appear increasingly focused on profitability, capital allocation, and the ability of companies to convert growth into sustainable earnings. This is particularly evident within technology and AI-related industries, where expectations remain high, and investors are looking for evidence that significant investment spending will ultimately generate attractive returns.
At the same time, the broader backdrop remains relatively encouraging. Economic growth continues, labor-market conditions remain healthy, Treasury yields have stabilized after a significant run higher, and early earnings reports have generally supported the view that U.S. businesses remain resilient.
While sector leadership may continue to evolve in the weeks ahead, we believe it is important to distinguish between rotation and deterioration. For now, the evidence continues to point toward the former. In our view, steady economic growth, resilient earnings, and improving market breadth remain far more important than the week-to-week fluctuations that naturally occur within financial markets.
