High hopes for Q3 earnings are outweighing concerns around interest rates and oil prices - but one expert warns markets have gotten 'extremely complacent'

JPMorgan Chase will be one of the first major companies to report earnings for the third quarter.

Hopes for blowout third-quarter earnings are one of the biggest things the market has going for it right now - and they're about to be put to the test.

JPMorgan Chase (JPM) and its fellow Wall Street big banks kick off third-quarter earnings season this week, and much of the rest of the corporate world will follow soon after. Their results will offer a deeper read on the U.S. economy and the extent to which America's largest companies can hit lofty growth targets in the face of high oil prices (CL00) (BRN00), rising borrowing costs and deficit concerns.

Sheraz Mian, director of research at Zacks, said the current upbeat earnings expectations have been "absolutely essential" to supporting the stock market. The S&P 500 SPX on Friday closed at 7,811.54, just off a record high.

"Interest rates are big headwind, and offsetting that is the extremely positive earnings outlook," Mian said.

Wall Street analysts expect the companies in the S&P 500, taken together, to post third-quarter earnings growth of 29.6%, according to a FactSet report released Friday. That would mark the third consecutive quarter of S&P 500 earnings growth above 25%.

Heading into third-quarter results, more companies than ever were upbeat about their bottom lines. That sentiment was particularly pronounced in tech, where companies are barreling ahead with a gargantuan artificial-intelligence build-out despite concerns about the costs - and the occasional rogue AI agent. Chip makers Micron Technology (MU) and Nvidia (NVDA) have been among the S&P 500's heaviest hitters as far as earnings performance is concerned.

Ken Mahoney, CEO of Mahoney Asset Management, noted that third-quarter results, particularly in tech and for larger companies, are crucial to "holding up what otherwise is a reeling market in most other sectors at the moment."

"High oil prices and yields ripping puts valuations under pressure, so that earnings growth is key," he added.

While AI is driving the stock market, concerns about government deficits and the U.S. economy have caused a sharp rise in government bond yields. The AI borrowing spree has also reshaped the bond market and helped drive yields higher. Meanwhile, the Iran war continues to keep oil and gas prices elevated. Consumers are still spending, but they don't necessarily feel great about it.

Bob Lang, founder of the trading service Explosive Options, said that even as investors ride earnings optimism, he feels that markets are "extremely complacent" right now.

"I think that's a mistake, especially since we've had this large rise not just in oil but also in interest rates," he said. "I think that there's a real threat of higher inflation down the road - even higher than we had."

Citi equity strategist Scott Chronert highlighted in a recent report that the half of the market "tied to the AI playbook should show revenue trends consistent with what we saw" in the second quarter. The other half of companies, meanwhile, could "express incremental conservatism" as a result of factors like high oil prices and rates.

Daniela Hathorn, senior analyst at Capital.com, said in emailed commentary that as companies prepare to report results, the current economic backdrop means they've had to work harder to earn their stock-market valuations.

"The underlying tension remains unchanged: Corporate earnings expectations are exceptionally strong, but with the 10-year Treasury yield BX:TMUBMUSD10Y still above 5%, the hurdle for equity valuations is becoming increasingly demanding," Hathorn wrote.

When JPMorgan, Goldman Sachs Group (GS), Citigroup $(CUL3)$ and Wells Fargo $(WFC)$ report results on Tuesday - followed by Bank of America (BAC) and Morgan Stanley (MS) a day later - the numbers will matter less than the commentary, Zacks's Mian said.

Since banks lend money to households and work with businesses in a variety of ways, Wall Street will be watching for any remarks about the impact of rising Treasury yields on the economy, as well as on investment banking, dealmaking and demand for credit. As rates have moved higher, shares of the big banks have trended lower over recent weeks.

"The earnings outlook for the banking sector remains generally favorable, in our view, with [earnings-per-share] revisions continuing to move higher throughout the year," Keefe, Bruyette & Woods analysts said in a research note on Wednesday.

Yet "the multiple [that] the market is willing to pay for these earnings remains a bit of a moving target," they added.

-Bill Peters