The Big Picture

Briefing.com Summary:

*Fourth-quarter earnings expectations are high, led by technology, with S&P 500 growth projected at 8.1% and estimates rising, not falling.

*Market valuation is stretched, making guidance critical; stocks risk selling pressure if outlooks disappoint despite solid reported results.

*Banks may kick off earnings positively, but sustained market gains depend on 2026 earnings growth meeting optimistic forecasts.

The start of 2026 hasn't lacked excitement on the news front, and it is about to get even more exciting for the stock market when the fourth quarter reporting period begins. Starting next week and continuing through March (yes, March!), there will be a steady stream of earnings results for the December quarter.

The heart of the reporting period will be the late-January to early-February timeframe, but things will get pumping next week when the banks start spreading their news.

Earnings are always important for the stock market, but they are exceptionally important at this juncture, along with the guidance, because nothing other than good news is embedded in the market's premium multiple.

Looking Good on Paper

The good news, statistically speaking, boils down to this: 

• The fourth-quarter blended earnings growth for the S&P 500 is 8.1%, up from 7.2% at the end of September. This will mark the tenth consecutive quarter of earnings growth.
  • The vast majority of this growth is expected to be driven by the information technology sector. Its blended earnings growth rate is 25.8%, according to FactSet, which translates into an earnings growth contribution of 6.39 percentage points (pp).
  • The next largest contributions are anticipated to flow from the financials (1.21 pp) and communication services (0.65 pp) sectors.
  • The consumer discretionary (-0.31 pp), energy (-0.07 pp), health care (-0.03 pp), and industrials (-0.03%) sectors are expected to be drags on the blended earnings growth rate.
• Earnings in the first quarter are projected to increase 13.2%, up from 11.7% at the end of September.
• The forward 12-month EPS estimate is currently $309.80, according to FactSet, up from $292.44 at the end of September.
• The estimated earnings growth rate for CY26 is 15.0%, which is above the trailing 10-year average of 8.6%, according to FactSet, and on pace to be the third consecutive year of double-digit growth.

Everything looks good on paper in terms of earnings. All that has to happen now is for the companies to deliver. This is the part where it seems natural to say, "easier said than done," only that would be disingenuous. The fact of the matter is that S&P 500 companies, in aggregate, typically exceed the earnings growth forecast going into a reporting period by at least two percentage points.

The nuance is that, sometimes, they are beating lowered expectations. Analysts typically lower their earnings estimates as a quarter unfolds. That hasn't been the case this time, however. FactSet reports that estimated earnings for the fourth quarter on a per-share basis have increased by 0.4% since the end of the third quarter.

It can be said, then, that the bar for fourth-quarter earnings has been set high. Many companies have high stock prices to show for it, and to be sure, the fall from higher levels hurts more when a company doesn't live up to expectations. The degree of hurt, however, is proportional to the degree of disappointment when it comes to earnings guidance.

Companies are rewarded or penalized far more on their guidance than their actual results, albeit with some exceptions for companies that don't provide guidance or that materially underperformed in the quarter being reported.

That is a good segue to the banks and the financial companies. They don't typically provide specific EPS and revenue guidance, so they will be judged more on their performance in the fourth quarter and comments on industry conditions from management that will be more qualitative in nature.

The good news is that the banks and financial companies are primed to report good news. That is the message emanating from stock prices and industry/sector ETFs, many of which are at, or near, record highs.

There is certainly a sense that capital markets activity is robust, that credit conditions overall are in a good state, and that the economy, bolstered by an easier Fed and fiscal tailwinds, is continuing on a growth trajectory.

Briefing.com Analyst Insight

The reporting period should start on a good note in terms of absolute numbers thanks to the banks, but what remains to be seen is if that good news translates into positive price action or serves as a catalyst for selling into the news.

That is a risk many stocks run with the market, at 22.4x forward 12-month earnings, trading at a 20% premium to its 10-year average. It's not as much of a risk, however, if the earnings growth materializes as expected.

As it so happens, the S&P 500 traded at 22.4x forward twelve-month earnings as 2025 approached, and the market managed a 16.4% price gain in 2025, with earnings increasing approximately 13%.

Earnings, therefore, drove returns in 2025, garnering some extra support from falling interest rates, deregulation, pro-cyclical fiscal plans, and, of course, easier monetary policy.

Those elements are all up for renewal, so to speak, in 2026, which is why earnings optimism is running high. We should get another taste of the good earnings backdrop in 2025 with the fourth-quarter reports, yet market participants are looking straight ahead at the 2026 outlook.

They like what they see now, but the earnings estimate trend is going to determine just how much they like what they see at year's end. The road there starts with this reporting period.

--Patrick J. O'Hare, Briefing.com