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The S&P 500 is entering the final quarter of 2026 with corporate earnings still strong, but the macroeconomic backdrop is becoming less supportive for equity valuations. The latest softer employment data has reduced expectations for an October Federal Reserve rate hike, providing some near-term relief for stocks. 1
However, the bond market remains a major concern. The 10-year Treasury yield is around 5.3%, while the 30-year yield is near 5.6% and the two-year yield around 4.8%.2 Persistent inflation, fiscal concerns, Treasury supply and the term premium are keeping long-term borrowing costs elevated despite weaker employment data.
For equities, the key question is whether earnings growth can continue to outrun the pressure from higher discount rates. The S&P 500 forward price-to-earnings multiple has already fallen from roughly 23 times to around 19 times over the past year as real yields have risen.2 If yields remain above 5%, however, companies will need to deliver strong earnings growth to justify current valuations.
Source: TradingView. US Treasury yields year-to-date, as of October 5, 2026.
Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at
The weaker labour market gives the Fed more room to pause in October, but it does not eliminate the inflation problem. Markets are now pricing an October pause, potentially followed by a 25-basis-point hike in December. Meanwhile, the Fed’s September projections put the median policy rate at around 4.1% at the end of both 2026 and 2027,3 while futures markets are pricing in two additional 25-basis-point hikes in 2027. The path forward will therefore depend heavily on inflation and the labour market.
Oil adds another layer of risk. Brent crude traded around $100 a barrel in September, with supply concerns pushing prices higher. Higher oil prices can keep inflation elevated and simultaneously squeeze household purchasing power, raise corporate costs and reduce the scope for monetary easing.4
The strongest argument against a significant S&P 500 correction remains earnings. Goldman Sachs estimates that S&P 500 EPS grew 51% year over year in the second quarter, with AI investment accounting for almost half of earnings growth this year.5
FactSet estimates also point to continued strength. Aggregate 2026 bottom-up EPS estimates rose 6.1% between June 30 and August 31, reaching $361.38.6 The Magnificent Seven are expected to deliver 31.8% earnings growth in Q3, while the other 493 companies are projected to grow earnings by 25.5%, suggesting that earnings growth is broadening beyond mega-cap technology.7
The next test is whether AI spending continues to translate into sustainable revenue and profits. More than 65% of S&P 500 companies discussing earnings during the summer mentioned AI, well above the five-year average.8 However, investors will demand evidence that spending on chips, data centres and infrastructure is generating sufficient returns rather than simply driving higher capital expenditure.
The final quarter will be dominated by the interaction between earnings, Treasury yields, inflation and Fed policy. The most important signals will be whether employment continues to cool without triggering a recession, whether inflation remains sticky and whether Q3 earnings produce further upward revisions to profit forecasts.
The S&P 500 can remain supported if earnings continue to surprise positively and Treasury yields stabilise. A move towards 8,000 would be achievable without a major expansion in valuation multiples if earnings estimates continue rising.
The greater risk is a simultaneous deterioration in earnings, yields and oil. If earnings expectations fall while Treasury yields remain above 5% and energy prices stay elevated, the market would have considerably less fundamental support.
Ultimately, the S&P 500 year-end trajectory will depend on whether AI-driven earnings growth can continue to offset the valuation pressure created by a higher cost of capital. That balance between earnings momentum and elevated bond yields is likely to remain the defining force for equities through the end of 2026.
Professional investors looking for magnified exposure to the S&P 500 may consider Leverage Shares +5x Long S&P 500 or -5x Short S&P 500 ETP.
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