Earnings Season: The 2026 Rally's Next Test

The S&P 500 is flirting with all-time highs, but its momentum is fragile. After a year of exceptional gains, the index has climbed into 2026 amid a wave of domestic policy proposals and heightened geopolitical tensions. In this environment, the market has largely shrugged off the noise, but as strategist Art Hogan notes, it is literally an imperative that earnings actually carry the news cycle. The rally, built on hopes for policy stimulus and AI-driven growth, now faces its first major test from corporate profits.

That test arrives with a high bar. Wall Street analysts expect S&P 500 companies to report an earnings per share growth rate of 8.3% for Q4, which would mark the 10th consecutive quarter of annual earnings growth. Meeting this consensus is critical, as any stumble could quickly unravel the fragile narrative supporting record valuations. The pressure is amplified by the market's extreme concentration. The so-called 'Mag 7' tech giants now represent nearly 35% of the S&P 500, a level historically associated with vulnerability. This concentration means the entire index's health is being judged on a handful of companies, making the upcoming earnings reports not just quarterly updates but a referendum on the rally's sustainability.

The Earnings Test: Breadth and Guidance

The initial bank reports have set a clear tone: the rally's sustainability depends on which companies lead. JPMorgan's weaker profit and revenue than analysts expected sent its stock lower and weighed on the broader market. That miss, possibly tied to its recent Apple Card acquisition, contrasts sharply with Morgan Stanley's strong beat. The latter's exceeded Wall Street expectations, powered by a record year for wealth management and a 47% surge in investment banking revenue. This divergence within a single sector is a warning sign. It suggests the earnings growth story is not uniform, and the market's high bar may be harder to clear for some.

The coming week will test that breadth beyond finance. Reports from Netflix, Johnson & Johnson, and Intel will show whether the profit expansion is broadening across the economy. For Netflix, the focus will be on its 2026 guidance. The company's stock, while no longer "grossly overvalued," still trades above its fair value estimate. Any forward outlook that signals a slowdown in its core U.S. market or hints at new price hikes will be scrutinized for clues on growth sustainability. This is the kind of forward-looking signal that can move markets, as strategist Art Hogan emphasized.

Analysts themselves have raised the bar, particularly for tech. The consensus estimate for S&P 500 Q4 earnings growth has climbed to 8.3%, up from 7.2% earlier in the year. This optimism is baked into valuations. For the rally to hold, companies must not only meet these elevated expectations but also provide the kind of confident guidance that can reward them. As the market gyrates near records, the quality of the earnings narrative-its depth and its forward view-will be the ultimate test.

Valuation and the Historical Lens

The market's current valuation is a direct function of its recent performance. With the S&P 500 trading at a forward P/E of 22x, it matches the peak multiple of 2021 and approaches the record 24x seen in 2000. This premium is supported by the expectation of continued earnings growth. Goldman Sachs Research forecasts earnings per share (EPS) to increase 12% in 2026, a significant deceleration from the 18% seen last year. This shift signals the end of an easy-growth phase. For the rally to hold, this projected growth must materialize, as elevated multiples leave little room for error.

The market structure itself raises red flags. The concentration of market capitalization among a handful of technology companies is at a record high. This mirrors the late 1990s tech bubble more than typical bull markets, where the top tech stocks accounted for 53% of the S&P 500's return in 2025. Such extreme concentration embeds idiosyncratic risk and makes the entire index vulnerable to a stumble by a few giants. Historically, the S&P 500 has not delivered double-digit returns for four consecutive years since that bubble era, a pattern that suggests the current run may be nearing a natural inflection point.

The key uncertainty for earnings quality is the AI investment boom. While Goldman expects AI investment to increase this year, its impact on corporate profits remains a critical question. The narrative of an "emerging productivity boost" is central to justifying high valuations, but it is not yet a proven, broad-based driver of earnings. If the promised productivity gains fail to materialize across the economy, the earnings growth story could falter, leaving the market's lofty multiples exposed.

Catalysts and Risks: What to Watch

The coming week is the immediate catalyst. The market's high bar for Q4 earnings is now being tested by a broader set of companies, from Netflix to Johnson & Johnson. The primary signal will be not just quarterly results, but the forward view. As strategist Art Hogan noted, those companies that can meet and beat and raise guidance for the full year 2026 are actually going to get rewarded. For Netflix, that means scrutinizing its 2026 guidance for clues on whether its growth trajectory is slowing. The quality of this forward-looking commentary will set the tone for the year and determine if the earnings narrative can support the rally.

A key structural risk is emerging from Washington. The Supreme Court is set to hear arguments on President Trump's aim to oust a Federal Reserve governor. This debate over Fed independence could stoke inflation fears and increase U.S. debt financing costs. Such a shift would undermine the supportive earnings backdrop of low interest rates and easy credit that has fueled the bull market. It introduces a new layer of policy uncertainty that could pressure valuations, especially for growth stocks.

Ultimately, the market's ability to sustain momentum hinges on earnings growth meeting a demanding target. Goldman Sachs Research forecasts a 12% total return for the S&P 500 in 2026, a deceleration from last year's 18%. Achieving that requires consistent execution. The market's lofty forward P/E of 22x leaves little room for error. If the promised productivity boost from AI fails to materialize broadly, or if the concentration of returns among a few tech giants proves unsustainable, the earnings growth needed to support this forecast could falter. The setup is clear: strong, guided earnings are the necessary fuel; any disruption to the policy or economic backdrop is a potential headwind.