Dynamics to watch for 4Q25 earnings season

Review the latest Weekly Headings by CIO Larry Adam.

Key takeaways

• As 4Q25 earnings season kicks off, tech again drives EPS growth
• For 2026, growth contributions from other sectors should be more visible
• With valuations in 98th percentile, earnings will need to be the driver of markets

As we step into the new year, many of us are setting personal and professional goals for what we hope to accomplish in the months ahead. The same holds true for financial markets, where Wall Street strategists have been busy refining their outlooks for where the S&P 500 might finish the year. Unsurprisingly, sentiment remains optimistic, with the median year-end target at 7,555 – slightly above our forecast of 7,250. As we look ahead into 2026, 4Q25 earnings, which begin early next week with reports from the major banks, will provide important insight into whether those expectations are achievable. With the S&P 500 trading at historically lofty valuations, 4Q25 earnings will be closely watched for insights that will shape the year ahead. With just one S&P 500 company reporting earnings (Constellation Brands) and limited pre-announcements over the last three weeks, the upcoming wave of results could intensify volatility.

Below, we outline five key dynamics we will be watching as 4Q25 earnings season gets underway:

1. 1. Fundamentals support 4Q gains, but the bar is elevated: The S&P 500 wrapped up the fourth quarter on a strong note, climbing 2.7% - its third consecutive quarter of gains – and hitting 11 new record highs along the way. This resilience came despite worries about the economy and a looming government shutdown, and it largely reflects solid underlying fundamentals. Analysts expect S&P 500 4Q25 earnings to grow ~8% year-over-year, and if companies beat estimates by the usual 4-5%, we could see a fifth straight quarter of double-digit earnings growth – a streak we haven’t seen since late 2018. Adding to the optimism, earnings estimates for 4Q were revised up by 0.7% in the 12 weeks leading into reporting season, the biggest upward move since 2021. That’s a positive sign, but it also raises the stakes. With valuations already high, companies that miss expectations or offer cautious guidance could face sharp selloffs. In fact, during the third quarter, firms that fell short underperformed the S&P 500 by about 5% in the days that followed, the steepest gap since at least 2017.


2. 2. Earnings bifurcation persists – tech still drives the index: Headline earnings look solid, but dig a little deeper and the picture gets more uneven. Four of the 11 sectors are expected to post negative growth, and three more are barely in positive territory with growth of 1% or less. That’s the most widespread weakness we’ve seen since early 2023. So what’s keeping the overall numbers afloat? Technology. Once again, tech is doing the heavy lifting, powered by relentless AI investment. A composite of mega-cap tech names (MAGMAN*) could see earnings surge about 22%, compared to just 1.8% for the rest of the index. Looking ahead, the trend doesn’t stop here. Over the next three quarters, mega-cap tech earnings are projected to outpace the broader market by more than 15% in each quarter. Bottom line: Tech remains the engine of S&P 500 earnings growth – and we’re still bullish on the sector this year.


3. 3. How is consumer spending holding up? Sluggish hiring data and shaky consumer confidence have sparked worries about the health of the consumer. Holiday spending held up surprisingly well, but expectations for the consumer discretionary sector remain muted. Earnings for the group are projected to fall 4.5% in 4Q – the sharpest drop of any sector – largely due to weakness in autos and household durables. In this environment, what company leaders say will matter as much as what they report. We’re paying close attention to restaurants and travel names, which often serve as early warning signs for shifts in discretionary spending. The good news? We see brighter days ahead. As hiring steadies, inflation cools, the wealth effect gains momentum and bigger tax refunds boost household budgets, spending on big-ticket items should pick up. With consumer discretionary earnings growth poised to rebound to ~11% in 2026, we have upgraded the sector to overweight as a contrarian opportunity.


4. 4. Can margin expansion be sustained? Despite sluggish economic growth and tariff headwinds, corporate earnings showed impressive resilience in 2025. A key driver? Strong profit margins. Margins stayed above 13% every quarter last year – the first time that’s happened since 2021 – even as consensus expects a slight moderation for the second straight quarter. Margin strength has helped keep valuations elevated and earnings momentum intact. Looking ahead, the backdrop gets even better. Tariff comparisons will ease, productivity gains are accelerating – 3Q saw the fastest improvement since mid-2020 – and margins are projected to climb to a record 14.4% in 2026, topping the previous high of 13.9% set in 2018. Bottom line: margin strength remains a powerful tailwind for earnings growth.


5. 5. Earnings, rather than valuations, hold the key to 2026: Once fourth quarter results are in, attention will quickly turn to 2026. After several years of outsized returns fueled by P/E expansion, valuations are now near historic highs – the S&P 500 sits in the 98th percentile. This leaves earnings growth as the key driver for further market gains. Encouragingly, 2026 earnings estimates have held firm, defying the typical early downward revisions of ~4% typically seen in the 12 months leading up to the calendar year. Current consensus calls for earnings growth of ~14%, slightly above our forecast of 12%, which would mark the fastest pace since 2021. Technology remains the primary engine, but for the first time since 2018, all 11 sectors are expected to deliver positive EPS growth, a sign of broad-based strength. This constructive outlook supports our expectation for continued momentum, with a year-end S&P 500 target of 7,250.

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*MAGMAN represents a composite of Microsoft, Apple, Google, Meta, Amazon, Nvidia. The foregoing is not a recommendation to buy or sell MAGMAN stocks.

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