Why Record Earnings Buoy Stocks But Raise the Bar
Strong corporate earnings have been the bedrock of the U.S. equity rally through 2026, but according to Jessica Noviskis, OCIO portfolio strategist at Marquette Associates, that foundation is showing cracks. In a recent Bloomberg Markets interview, Noviskis warned that while earnings continue to support stocks, the market’s elevated expectations and rising yields leave it vulnerable to outsized declines if results disappoint. “When we do see those hiccups, we can see a bigger correction,” she said.
The S&P 500 has climbed roughly 18% year-to-date as of early September 2026, fueled by better-than-expected profit growth across tech and industrials. Yet Noviskis argues that the consensus has priced in near-flawless execution, leaving little room for error. With the Federal Reserve maintaining a restrictive stance to combat sticky inflation, the risk-reward for equities has become asymmetrically skewed to the downside.
Higher Yields Raise the Bar for Earnings Quality
The 10-year Treasury yield has hovered near 4.5% since late August 2026, up from 3.9% at the start of the year. This rise in yields increases the discount rate applied to future earnings, making high-multiple stocks—especially in growth sectors—more sensitive to any shortfall. Noviskis emphasized that the combination of high valuations and rising borrowing costs means investors are demanding not just growth, but growth that exceeds already-lofty projections.
Historical data supports her caution: in the past two decades, when the S&P 500’s forward P/E exceeded 22 times (as it does now, at roughly 23.5), the index has experienced average drawdowns of 8-12% within six months if earnings missed by even 2%. The current earnings season, which wrapped in mid-August, saw 78% of companies beat estimates—but the magnitude of beats has narrowed, with the average surprise falling to 3.1% from 5.4% a year earlier.
What a Disappointing Quarter Could Trigger
A correction, Noviskis suggests, could be swift and severe because positioning is crowded. Fund managers surveyed by BofA in August 2026 held equity allocations at their highest since 2021, with cash levels near 3.8%—well below the 5% threshold often seen as a contrarian buy signal. If third-quarter earnings, due to begin in mid-October, show even marginal weakness, the unwinding of these positions could amplify losses.
“We’re not calling for a bear market, but we’re telling clients to brace for volatility,” Noviskis noted. She pointed to sectors like semiconductors and software, where expectations have run hottest. The iShares Semiconductor ETF ($SOXX) is up 34% in 2026, but any chipmaker guidance cut could trigger a sector-wide selloff, dragging the broader indices down.
Watch the Fed and the First Big Earnings Reports
The immediate catalyst to watch is the Federal Reserve’s September 16-17 policy meeting. If the Fed signals another rate hike—futures currently price a 35% chance of a 25bps move—that could push yields higher and pressure equities further. Conversely, a dovish surprise might temporarily soothe markets, but Noviskis argues it won’t erase the fundamental mismatch between prices and reality.
Investors should also monitor early third-quarter earnings from bellwethers like JPMorgan and Apple, due in October. A broad-based miss, defined as fewer than 70% of S&P 500 companies beating EPS estimates, would likely confirm Noviskis’s thesis. Until then, the market remains a tightrope walk between record profits and the weight of expectations.
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