Deutsche Bank is bullish on the U.S. stock market's year-end rally: Q3 earnings growth is expected to remain at 34%, with AI and cyclical growth still strong.

Deutsche Bank is bullish on the U.S. stock market's year-end rally: Q3 earnings growth is expected to remain at 34%, with AI and cyclical growth still strong. Deutsche Bank released a preview report on Q3 2026 U.S. stock earnings, stating that the multiple tailwinds that drove the S&P 500's earnings growth to a record high of 34% in Q2 remain strong in Q3, and it expects Q3 growth to remain at 34%, with no deceleration in earnings growth. By comparison, the market consensus expects Q3 growth of 26.7%, implying a deceleration of 7.5 percentage points from Q2. Deutsche Bank's forecast is about 6 percentage points above consensus, while historically the average earnings beat during earnings season has been only 3.3%. The bank believes this quarter will once again see an above-average beat. Three Major Tailwinds Working Together Deutsche Bank noted that the earnings boom stems from three tailwinds firing simultaneously: accelerating AI demand growth, up 54% year-over-year, contributing 20 percentage points to overall growth; a rebound in cyclical growth, at 14% excluding the technology, energy, and materials sectors, contributing 8 percentage points; and rising oil and commodity prices, driving 108% earnings growth in the energy and materials sectors, contributing 7 percentage points. It should be noted that the 34% growth rate has been adjusted to exclude one-time items such as Alphabet's asset sale gains and Amazon's unrealized investment gains. Before adjustment, the growth rate was as high as 53%. Three Major Divergences Between Deutsche Bank and the Market No Signs of AI Demand Slowing In response to market concerns about whether AI demand can continue, Deutsche Bank believes multiple indicators show that AI demand growth in Q3 remains very strong. The bank cited examples including South Korea's semiconductor production and export growth accelerating further from Q2 to Q3, while continuously rising GPU rental prices indicate that supply and demand conditions remain very tight. South Korea's semiconductor export growth rising The bank expects AI demand to drive earnings growth for mega-cap growth stocks and the technology sector to remain at a high of 54% in Q3, and as their weight in S&P 500 earnings rises, their contribution to overall growth will increase from 19.5 percentage points in Q2 to 21 percentage points. Cyclical Growth Further Accelerating Deutsche Bank pointed out that a large number of indicators show cyclical growth strengthening further in Q3. The U.S. ISM Manufacturing Index rose sharply in Q3 to its highest level in four and a half years, and this indicator has historically been the best cyclical leading indicator for S&P 500 earnings growth. U.S. ISM Manufacturing Index rising Macro consensus shows that U.S. GDP growth will accelerate from 2.2% in Q2 to 2.8% in Q3 (quarter-over-quarter annualized), with the Atlanta Fed's tracking forecast as high as 3.7%. In addition, retail sales, industrial production, and capital goods shipments growth remain strong, and cyclical employment has continued to recover after bottoming in February. Limited Lagged Impact from Oil Prices, Tariff Refunds Add Further Support Regarding the lagged negative impact of high oil prices, Deutsche Bank believes it remains mild and concentrated in specific sectors. The research report stated that historically, the impact of oil price shocks on earnings of other S&P 500 sectors lags by 2 to 3 quarters and is usually mild in magnitude, because most companies respond by raising prices and improving productivity. Airlines, autos, and some consumer sectors are hit faster and harder, but their earnings expectations have been significantly revised down since the outbreak of the Iran war airlines down 17%, autos and packaging each down 9%, and travel excluding airlines down 6%. In addition, after the Supreme Court ruled IEEPA tariffs invalid, companies continue to receive tariff refunds, which the bank expects will contribute about 2 percentage points to overall Q3 earnings growth, same as in Q2. Earnings Season Combined with Midterm Elections, Favorable Risk-Reward for Year-End Rally Deutsche Bank emphasized that earnings season has historically been bullish for stocks. Since the financial crisis, the S&P 500 has risen in three out of four earnings seasons, with an average gain of 2%, and this pattern has been even more pronounced over the past year. Although this quarter coincides with the late-October FOMC meeting and the early-November U.S. midterm elections, which could bring additional volatility, historical patterns show that the market tends to trade sideways or weaken before major risk events are resolved, then rally afterward. The bank also noted that the risk-reward in the fourth quarter of midterm election years has historically been very favorable, with the S&P 500 rising in 21 of the past 23 election years during Q4, with an average gain of 7%. Taken together, the bank believes the current risk-reward for U.S. stocks remains favorable.