Earnings Resilience Put to a Test!

North American equity markets have delivered a strong performance year-to-date underpinned by robust earnings growth notwithstanding heightened geopolitical tensions, tariff uncertainty, inflation worries, uncertainty on Fed policy trajectory, and most recently; rising bond yields. As of this writing, Bloomberg data suggests that the earnings for S&P 500 Index and S&P TSX Index for the third quarter of 2026 are expected to increase by ~+27.3% and ~+27.1%, year/year; respectively. As the third-quarter earnings seasons kicks off – we think the resilience of equity markets will be tested given the high bar of expectations from corporate earnings. Any wobble on any metric of the corporates that could translate into slowing growth or decreasing margins could attract increased scrutiny from investors, in our view.

While this set-up suggests potential for higher volatility especially in the segments of equity markets where earnings growth has been phenomenal and valuations are stretched; we think this alone is not sufficient to derail the bull case for equities.  Unless the earnings disappointments are broad based and investors begin to dial down their expectations, we believe the arguments to maintain constructive outlook on equities remains strong. That said, we do note that macro economic headwinds have increased over the past few weeks with sharp rise in bond yields across the yield curve and inflation numbers that have surprised on the upside. During the month of September, the yields of US treasuries across the 2-year to 30-year tenures increased by ~35-54 basis points with rise in yields relatively more pronounced at the short end of the curve, i.e. the yield curve flattened (See Figure 1). We believe the rise in bond yields was driven by: a) high term premia owing to high levels of borrowing by government alongside high corporate borrowing to build out Artificial Intelligence infrastructure; b) rising inflation expectations given persistent energy supply disruption; and c) strong economic activity. Higher benchmark yields impact the markets by increasing cost of capital which translates into lower valuation for equity markets and in the real economy increased cost of borrowing for consumers/corporates slows down the economic activity.

 Figure 1: US Treasury Actives Curve (1st Sept – 30th Sept, 2026) 

Source: Bloomberg

The steep rise in bond yields during September has partially reversed during the first half of October (See Figure 2). Interestingly, the bond yields decline came despite inflation numbers printing hotter then expected. The headline Consumer Price Inflation (CPI) for the month of September (reported in October) was at +3.7% year/year, an increase from +3.4% year/year in August (reported in September) and higher than expected number of +3.6% year/year. The headline Producer Price Index (PPI) also came in hotter-than-expected at +6.3% year/year for September (reported in October). A significant jump from expectations and previous month’s reading at +5.4% year/year. We think the recent decline in yields is explained by a dash for safety by investors along with rising yields getting to a level where they looked attractive enough to draw investors.

Figure 2: US Treasury Actives Curve (1st Oct – 16th Oct, 2026) 

Source: Bloomberg

Bank of Canada held policy rates at +2.25% while acknowledging upside risks to inflation and risks to growth given trade uncertainty. The United States Federal Reserve increased policy rate by +25 basis points to +4.0% in line with the market expectations citing persistent inflationary pressures and strong economic growth. The rate hike also helped mitigate some of the investor concerns around Fed’s credibility, independence and determination to fight inflation.

Looking ahead, we think the drivers that led to rise in bond yields such as high inflation and persistent borrowing alongside high sovereign debt, remain in place. In addition, the mid-term elections in the United States will add to the market uncertainty for the next few weeks. Therefore, we think the onus to support the equity markets ultimately rests upon the continued resilience of the corporate earnings growth. The third-quarter earnings season will shape up the investor confidence and provide a peak into the outlook for 2027. We remain constructive in our outlook given solid earnings expectations while remaining cognizant of growing near-term concerns.

Source: Bloomberg

Vipul Arora is a Portfolio Manager with CI Assante Wealth Management Ltd. The opinions

expressed are those of the author and not necessarily those of CI Assante Wealth

Management Ltd. Please contact him at 613-258-1997 or visit ofarrellwealth.com to discuss

your circumstances prior to acting on the information above. CI Assante Wealth Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. Insurance products and services are provided through Assante Estate and Insurance Services Inc