Wall Street Faces its First Major Test of the Year

Q4 2025 earnings season is about to get underway on Wall Street, and expectations are running high. After a year defined by resilient growth, easing financial conditions and relentless enthusiasm around artificial intelligence, the upcoming reporting season will act as the first real stress test for the market heading into the new year.

The season begins, as usual, with the major US banks, setting the tone not just for financials but for broader risk appetite. Beyond individual results, investors will be watching earnings as a proxy for economic momentum, pricing power and the sustainability of the current equity rally.

Earnings Growth Still Doing the Heavy Lifting

Consensus expectations suggest US corporates are still delivering. Aggregate earnings for the S&P 500 are forecast to rise again on an annual basis, extending a long-running streak of expansion. Revenue growth is also expected to remain solid, reinforcing the idea that profits are being driven by genuine top-line momentum rather than cost cutting alone.

In a market that has rerated aggressively over the past year, earnings durability has become the key pillar supporting valuations. As long as profits continue to grow, investors are likely to remain tolerant of elevated multiples.

Valuations High, But No Immediate Catalyst for Concern

By traditional standards, US equities are expensive. Forward valuation multiples remain above long-term averages, even after some moderation late last year. However, valuation alone has rarely been an effective timing tool, and history shows markets can remain expensive for prolonged periods when earnings growth is strong and liquidity conditions are supportive.

For now, valuations are less a warning sign and more a source of fragility. With markets priced close to perfection, the margin for disappointment is slim. That places a premium on guidance, commentary and forward visibility during earnings calls.

Sector Breadth is Improving

One of the more constructive aspects of this earnings season is the breadth of expected growth. Most sectors are forecast to deliver higher earnings compared to a year ago, led by technology and materials. Revenue growth also looks broad-based, suggesting demand remains resilient across much of the economy.

A clear laggard is consumer discretionary, where margin pressure and softer spending trends continue to weigh. Energy revenues are also expected to decline, reflecting the sharp pullback in crude prices over the past year. Outside those pockets, the earnings backdrop appears healthier than many had feared.

US Banks Set for Strong Q4 Amid Dealmaking Rebound

The major US banks kick off reporting season next week and will be watched closely as they are bellwethers for economic activity, credit conditions and capital markets health.

All signs point to a strong quarter. Investment banking activity has rebounded meaningfully, dealmaking has accelerated and trading desks have benefited from elevated volatility across asset classes. Loan growth and net interest margins are also expected to support results, while credit quality remains broadly stable. A surge in mergers and acquisitions and a healthier IPO pipeline have created a supportive backdrop for the largest lenders.

Pro-growth policy, lighter regulation and changes to capital rules are likely to further support banking activity in the year ahead. While inflation and the interest rate outlook remain key uncertainties, credit conditions are expected to stay manageable, limiting the impact of any rise in delinquencies. The banking sector enters earnings season at elevated price levels, demonstrating confidence in both earnings momentum and a favourable regulatory and macro environment.

At the individual bank level, results are expected to be mixed but broadly positive. JPMorgan, Bank of America, Citigroup, Wells Fargo and Morgan Stanley are all likely to deliver solid earnings growth, with Goldman Sachs the only exception as profits are expected to ease after an unusually strong prior-year quarter.

Big Tech and the Magnificent Seven Under Scrutiny

Alongside the banks, earnings from the mega-cap technology names will dominate attention. Their sheer weight in major indices means they continue to exert outsized influence on overall market performance.

While performance across these stocks diverged last year, expectations remain demanding across the group. Investors are not just looking for earnings beats, but for reassurance that heavy investment in artificial intelligence is translating into a credible path to returns.

Capital expenditure plans, funding sources and timelines for monetisation will be central themes. Markets are increasingly sensitive to whether AI investment is being funded through robust free cash flow or rising debt, a distinction that could drive sharper dispersion in share price reactions.

AI Remains Central but Investors Want Proof of Returns

Artificial intelligence remains the dominant theme of this earnings season, extending well beyond the largest technology firms. Semiconductor companies, cloud providers and second-order beneficiaries tied to data centre construction, power infrastructure and cooling systems are all in focus.

To unlock post-earnings upside, companies will need to deliver a familiar but demanding combination. Solid results, constructive guidance and confident commentary. With concerns growing around financing costs and return on investment, the market is becoming more selective in how it rewards AI exposure.

Key takeaways

• Earnings growth remains the cornerstone supporting elevated US equity valuations
• Banks and big technology firms will set the tone for broader market confidence
• Artificial intelligence optimism is moving from hype toward scrutiny and selectivity