Following a year in which artificial intelligence dominated financial headlines, Wall Street’s focus is now shifting toward a more fundamental evaluation of stocks—earnings power that is increasingly extending beyond just Big Tech companies. Major financial institutions, including Morgan Stanley and UBS, are highlighting key indicators during this earnings season: strong profits, stabilizing margins, and growth that, while still heavily concentrated in AI-driven technology, is beginning to widen across other sectors.
In a recent client note, Morgan Stanley equity strategist Mike Wilson provided insights into the current earnings landscape. He pointed out that data indicates a positive earnings recovery underway, with improved pricing power. According to his analysis, the so-called “Magnificent Seven”—a group of leading tech companies—are projected to achieve a remarkable 23% net income growth for the third quarter. In contrast, the broader index is anticipated to see only a 12% increase. Wilson emphasized that there are encouraging signs for broader growth ahead, evidenced by higher earnings revisions and substantial revenue performance that exceeds historical averages.
Supporting this perspective, FactSet’s latest statistics reveal that, with over 90% of S&P 500 companies having reported their earnings, 82% surpassed expectations. Overall profits have experienced a year-over-year increase of 13.1%, marking the fourth consecutive quarter of double-digit growth. Furthermore, six out of the eleven sectors represented in the index are experiencing year-over-year earnings gains, prominently featuring Technology, Financials, and Consumer Discretionary. This diversification of earnings is a noteworthy indication of stability and growth beyond the tech sector.
However, some analysts caution that the positive momentum in earnings must continue for sustained market confidence. Lori Calvasina of RBC Capital Markets noted that while earnings sentiment has seen a partial rebound and revisions have improved over the past two weeks, they remain lower than the highs observed during the summer. She acknowledged the solid foundation that earnings provide for the U.S. equity market, particularly given the resilience of corporate leadership. Yet, Calvasina pointed out that the recent recovery has not been strong enough to dispel concerns around earnings sentiment potentially having peaked over the summer. She warned that the stock market pullback observed last week may signal underlying investor unease.
In this evolving scenario, Wall Street’s AI-driven stock market rally appears to be transitioning into one characterized more decisively by earnings growth. Evercore ISI strategist Julian Emanuel described the current market landscape as a “K-shaped stock market,” indicating a divide where AI-linked stocks and high-quality growth stocks are outperforming the broader S&P 500. Emanuel noted that despite the concentration of value among the top ten stocks—accounting for about 40% of the index—these stocks are not overly valued, which, according to him, provides both a safeguard and a roadmap for further gains. He maintains a bullish outlook, projecting a year-end 2026 price target of 7,750 for the S&P 500, driven by robust market participation and investor confidence in the underlying fundamentals.
