US Stock Outlook for the End of 2026 – If profits grow despite high interest rates, can US stocks still rise by year-end?
Interest rates are high.
Stock prices are not cheap either.
Can we still remain bullish on US stocks? If we are considering the market from October to the end of the year, this is the first question we want to address.
In addition to the high profit growth rate, there is also the direction in which forecasts have moved. Profit and revenue forecasts for the July-September quarter have both risen, and company outlooks were more positive than in typical years.
Moreover, the price-to-earnings ratio based on 12-month forward earnings is lower than it was at the end of June. While the outlook for profits generated by companies is strengthening, the expected P/E ratio has not expanded. This combination is the reason for a positive outlook on US stocks from October to December.
However, the core of this strength is skewed toward tech, including semiconductors.
Capital inflows into equity funds, increased production of Japanese semiconductor manufacturing equipment, and expectations of interest rate hikes by the Bank of Japan might all seem to follow the same narrative. In reality, what is being measured and the timeframes are different. I will organize what each of these four factors contributes and where we cannot draw further conclusions.
A more surprising upward revision than 29.5%
According to the forecast published by FactSet on October 2nd, profits for S&P 500 companies in the July-September quarter of 2026 are expected to increase by 29.5% compared to the same period last year. The forecast at the end of June was for a 26.7% increase. Revenue growth for the same period was also raised from 10.9% to 12.3%.
What we want to look at here is the level and direction of the forecasts.
According to FactSet, the EPS for the July-September quarter expected by analysts increased by 1.4% during the quarter. In the same period over the past five years, it had fallen by an average of 2.2%.
Estimates, which usually become more cautious as the end of the quarter approaches, have risen this time instead.
This means the market received new information during the summer and upwardly revised corporate earnings.
Moreover, revenue forecasts are also rising.
If only profit forecasts were increasing, the possibility would remain that EPS was being boosted by changes in tax rates, share buybacks, or cost reductions. With both revenue and EPS trending upward this time, the outlook is for the revenue earned by companies to also expand. Whether this is due to increased sales volume, price hikes, or an increase in the ratio of high-priced products cannot be determined from this aggregate data. Even so, without relying solely on profit margin improvements, we can map out a growth path where “revenue increases and a portion of that becomes profit.”
This composition provides a floor for the year-end market.
Stock prices put a value on future earnings. If the upward revision for the July-September quarter is temporary, that valuation will not hold. However, FactSet also expects a 27.6% profit increase for the October-December quarter, and forecasts a 32.4% increase for the full year of 2026 and a 15.8% increase in 2027.
The current analyst consensus is that strong profits will not end at the close of the year.
When looking at the market, it is significant that not only the 29.5% for the July-September quarter, but also the forecasts beyond that, remain strong.
Bullishness is also evident in corporate outlooks.
FactSet counted 72 companies that provided “positive” EPS guidance for the July-September quarter that exceeded market expectations just before the announcement, and 44 companies that provided “negative” guidance. The proportion of positive guidance is 62% out of 116 companies. This is significantly higher than the five-year average of 40%. The number of 72 companies is the highest since FactSet began tracking this data in 2006.
The outlooks provided by the companies themselves and the upward revisions by analysts are pointing in the same direction. When the market prices in good news, this carries weight.
However, 44 out of the 72 companies, or about 60%, are tech companies. While the number of positive companies has hit a record, the core of this is in technology. Note that the breadth in terms of the number of companies is different from their contribution to index earnings.
LSEG indicated on October 1stthat the profit growth forecast for the same quarter is 30.6%. Thirteen companies had already announced. The direction is the same as FactSet’s 29.5%, and they share the expectation of strong profit growth.
Even excluding semiconductors, will IT continue to grow?
There are variations in the momentum of profits.
According to a reportfrom FactSet on October 2nd, all 11 sectors have profit growth forecasts. The top sectors are energy at 114.0%, IT at 65.0%, and communication services at 51.5%.
The most eye-catching is the “Semiconductors & Semiconductor Equipment” industry in the FactSet classification.
Revenue for the July-September quarter is expected to increase by 82% year-on-year, and profits by 130%. This is significantly driving IT growth. However, it would be a mistake to stop reading here.
Even excluding this industry, IT profits are expected to grow by 24.4%. Hardware, storage, and peripherals are also seeing 36% revenue growth and 39% profit growth. Growth is not limited to chip sales alone.
In semiconductors, profits are expected to grow faster than revenue.
As production volume increases and fixed costs can be spread more widely, or as the composition of high-priced products increases, profits can grow more than revenue. It can be said that this indicates an expectation not only that “chip sales will increase” but also that “the profit remaining from those sales will also increase.”
This is also significant when looking at the market from October to December.
If only demand for semiconductors is high and other IT products are not selling, the market is easily swayed by the capital expenditure plans of a very small number of companies. If sales and profits grow beyond just chips, the range of companies benefiting from capital investment will expand.
Current forecasts point to the latter. The 44 companies that issued positive EPS guidance in IT are the most in that sector, matching the previous quarter.
Of course, one should not confuse growth rates with the amount of contribution to profits.
Even in an industry where profits increase by 130%, the share of the total index’s profit growth it accounts for is a separate calculation. Also, in a market where capital investment is linked, if major order sources change their investment plans, the impact will spread from chips to equipment and servers. The reason for valuing high growth lies not in the high growth rate itself, but in the fact that sales are also growing and spreading to peripheral industries.
The 114.0% for energy should also be read differently.
Year-on-year figures jump significantly depending on the previous year’s profit levels and changes in resource prices. The reason for growth is different from the 65.0% in IT.
Rather, the focus is on the fact that all 11 sectors with different characteristics are expected to see positive growth. A market where other industries are also increasing profits is more likely to maintain bullishness until the end of the year than a market where only large-cap tech carries the index. This is likely the implication that can be drawn from the figures of the 11 sectors.
There are also variations in that spread.
FactSet links the profit growth in energy to the fact that the average crude oil price for the July-September quarter was 32% higher than the previous year. If profits are pushed up by prices, it is unlikely that they will grow at the same rate next year.
The 51.5% for communication services would also be 12.0% if Meta Platforms and EchoStar were excluded. Even with the same 11-sector profit growth, the growth changes when the contribution of individual stocks is removed. The strength of the bullish argument also depends on whether this concentration of contributions will fade toward next year.
Profits are strong, yet the expected P/E ratio has fallen
What is important for the market is how much of the strong performance is already priced into the stock price. The 12-month forward expected P/E ratio based on the closing price on September 30, as shown by FactSet—that is, the ratio of the stock price to future expected profits—is 19.0 times. This is lower than the 20.4 times at the end of June and also below the 5-year average of 19.8 times.
It is too early to decide that 19.0 times is cheap based on that alone. The 5-year average includes periods with different interest rates and industry compositions. However, there is significance in the fact that the multiple contracted during a phase where profit forecasts are rising. The rise in stock prices was smaller than the improvement in profit forecasts. If profit growth continues, the room to support stock price increases does not depend solely on an increase in the multiple.
Reading the FactSet report, that movement is even more specific. From June 30 to September 30, the index’s stock price rose 2.0%, while the 12-month forward expected EPS rose 9.3%. Because profit estimates grew faster than stock prices, the expected P/E ratio fell from 20.4 times to 19.0 times. This is different from a phase where stock prices fall and only the expected P/E ratio looks cheap. Over these three months, the improvement in profit forecasts outpaced the market’s rise.
The movement over these three months actually shows a path where stock prices rise even if the expected P/E ratio falls. The expected P/E ratio contracted by about 7%. Even so, because expected profits grew by about 9%, the index rose by about 2%. The cause of the P/E contraction cannot be pinpointed to interest rates. However, even in situations where there is pressure on multiples due to rising interest rates, there is room for upward revisions in profits to absorb that burden. This is why the bullish argument for the year-end market does not have to rely solely on falling interest rates.
So, is 19.0 times room for growth?
Or is it evidence that the market is skeptical about future profits? It cannot be decided by the P/E figure alone. It is positive that upward revisions in profit forecasts are accompanied by upward revisions in sales forecasts and positive guidance from companies.
What reduces market doubt is not announcing the profit growth rate for the July-September quarter once, but the further accumulation of expected profits for the October-December quarter. If it progresses that far, the amount of profit supporting the stock price will increase even if it remains at 19 times.
Let’s assume the stock price is roughly “12-month forward expected EPS × expected P/E ratio.”
Even if profit outlooks rise, if the P/E ratio falls, it is difficult for stock prices to grow. Conversely, if the P/E ratio holds around 19 times and expected EPS accumulates, upward pressure will be applied to stock prices. This is the most straightforward reason to be positive about the year-end market.
The 29.5% year-on-year figure for the July-September quarter and the stock price growth rate until the end of the year differ in both period and indicator. The profit to look at is the 12-month forward EPS forecast, which is updated weekly.
The FactSet report from October 2 lists the S&P 500 target value, which is the accumulation of analyst target prices for individual stocks, at 9,280.66, and the closing price on September 30 at 7,651.54. The difference is 21.3%. The evaluations of analysts in charge of individual companies are considerably higher than the market price at that time. Target prices are outlooks for the next 12 months. Their nature differs from figures that directly measure the growth rate until the end of the year or the market’s buying appetite.
Just a few days ago, in the September 28 FactSet article, the upside potential relative to the September 24 closing price was 20.4%. Because target prices and stock prices move respectively, the difference between the two rates cannot be read as the upward revision width of the target value itself. What they both have in common is that analysts in charge of individual companies had set targets that exceeded the market price at the time.