After more than a year of the market being dominated by the AI theme, Wall Street’s bullish logic is shifting towards more fundamental earnings growth. Market observations indicate that the momentum of growth is beginning to expand from large tech companies to broader sectors. Institutions such as Morgan Stanley and UBS have pointed out clear trends in the current earnings season: robust corporate earnings performance, gradually stabilizing profit margins, and while growth remains closely tied to AI technology, initial signs of “diffusion” are emerging. Mike Wilson, a strategist at Morgan Stanley, noted clear signs that corporate earnings are recovering and that corporate pricing power is strengthening.
Data shows that the “Magnificent Seven” tech stocks are expected to achieve a 23% net profit growth in the third quarter, while the net profit growth rate for the other companies in the S&P 500 index has also reached 12%. The overall growth momentum is gradually improving, with revenue significantly higher than historical averages and upward revisions to earnings estimates. FactSet data further corroborates this trend: over 90% of S&P 500 constituent companies have reported earnings, with 82% of them exceeding expectations. Overall profits increased by 13.1% year-over-year, marking the fourth consecutive quarter of double-digit growth. Additionally, six out of the eleven sectors in the index saw year-over-year profit growth, led by the technology, financials, and consumer discretionary sectors. This indicates that the strong growth momentum is beginning to spread, gently yet decidedly, to a broader range of sectors.
However, some strategists caution that this trend needs to be observed over a sustained period to confirm its solidity. Lori Calvasina, a strategist at RBC Capital Markets, pointed out that while earnings expectations have improved for two consecutive weeks, showing some recovery, they remain well below the summer highs. She believes that while earnings provide a solid foundation for the stock market, the recent recovery is not yet sufficient to challenge the view that “earnings sentiment peaked in the summer.” She described the recent market pullback as akin to “hearing the thunder of a gathering storm in the distance,” indicating that investor unease persists even against a backdrop of profit stability. This unbalanced backdrop has fostered what Julian Emanuel, a strategist at Evercore ISI, describes as a “K-shaped stock market” pattern, where high-quality growth stocks related to AI continue to outperform the overall S&P 500 index.
Emanuel emphasized that participation in the current bull market has been broad, a key distinction from the dot-com bubble era and a crucial factor for further gains. He expects this market dynamic to support his S&P 500 target of 7750 by the end of 2026. He noted that although the top ten stocks account for about 40% of the index’s weight, their valuations are not excessively high, which provides support and a pathway for further market gains. Meanwhile, UBS has also raised its S&P 500 target to 7500 by the end of 2026, anticipating 14.4% earnings growth. They judge that as capital investment “expands outward from the narrow tech field,” earnings growth will no longer be confined to the technology sector.
