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RESEARCH NOTE 009 · EQUITIES / EARNINGS / OUTLOOK

The Next Leg of the Equity Market

My 6–12 month view: earnings must carry more of the rally, leadership needs to broaden, and the Fed still sets an important hurdle.

Three glass paths diverge above Manhattan toward a sunlit horizon, illustrating different possible equity outcomes
Original AI-generated editorial illustration. The paths are conceptual, not market data.
MY EQUITY VIEWSelectively constructive

Positive direction over 6–12 months, with earnings doing the heavy lifting.

I lean positive on U.S. equities over the next six to twelve months, but I would be more selective about what I own than simply assume everything rises together. My central case is that companies can keep growing profits while interest rates remain a constraint. That would favor a market driven by earnings delivery and a wider set of businesses, rather than investors repeatedly paying more for the same earnings.

MY TAKEI want exposure to businesses that can turn demand into durable cash flow, including AI and the infrastructure supporting it. But I would not make the entire equity view depend on one theme or on imminent rate cuts. The strongest confirmation would be improving profit expectations across more sectors, with long-term yields settling rather than rising sharply.

01 / WHERE THE VIEW STARTSStrong growth, but a high bar to clear

FactSet’s October 16 snapshot put blended Q3 S&P 500 earnings growth at 29.0%, with only 9% of companies having reported. Among those reporters, 84% beat EPS estimates, but the aggregate beat was just 2.6%. The early sample is small, and “blended” combines reported results with estimates for companies still to report. [1]

My interpretation is that a high beat rate alone is not enough to justify a bullish view. I want to see how far companies beat expectations, whether sales support those profits, and whether management raises its outlook. A company can clear a lowered hurdle without improving its longer-term prospects. Equally, a small current-quarter miss can matter less if the outlook strengthens.

THE STARTING SNAPSHOTFactSet · October 16, 2026 [1]
29.0%Blended Q3 earnings growth
19.0×Forward 12-month P/E
9%Companies reported so far

Early evidence, not the final earnings-season result. Consensus estimates can change.

02 / THE EQUITY THESISThe next advance needs more than a good headline

I see three tests for the next leg higher. First, profit growth needs to survive the spending required to generate it. In AI, revenue growth is encouraging, but I would also track cash left after data-center investment and financing costs, while separately checking how depreciation affects reported profit. Suppliers may benefit from construction before the buyers earn an adequate return. Those are different investment cases.

Second, leadership should broaden. I would gain confidence if industrial businesses, consumer companies and selected financials were improving alongside technology. That does not mean every sector must rise. It means the earnings case should become less dependent on a handful of stocks. I would compare the equal-weight and capitalization-weighted S&P 500, then check whether earnings revisions support the price signal.

Third, the valuation must leave room for the result. FactSet’s October 16 forward P/E was 19.0×, close to its ten-year average of 19.1×. That is context rather than proof of cheapness: the index’s composition and expected growth can change, and forward earnings may be revised. [1] My positive view therefore relies more on earnings growth than on a large increase in the multiple.

Over six months, I expect results and guidance to test that view repeatedly, so a choppy market would be consistent with it. Over twelve months, sustained profit growth could have more time to outweigh those swings. A positive end point would not imply a smooth path.

03 / WHERE I WOULD LOOKOwn the cash-flow case, research the next beneficiaries

My preferred starting point would be a diversified equity core, with selective research around companies that have resilient margins, manageable debt and credible cash generation. These are qualities to investigate, not a claim that every stock with them is attractively priced.

GROWTH ENGINE

AI with economics

I would examine software adoption, chips and cloud demand alongside returns on the capital being spent. Revenue needs a path to cash.

BROADENING OPPORTUNITY

Power & industrial capacity

I would research grid equipment, electrical infrastructure and construction exposure, checking backlog quality, delivery constraints and valuation.

BALANCE

Durable demand

I would retain exposure beyond the AI cycle and test consumer resilience, recurring revenue and balance-sheet strength across industries.

I would be more cautious about businesses that need frequent refinancing or whose price assumes years of flawless growth. Small caps are not automatically a bargain if lower rates are required to make their debt affordable. Nor are large caps automatically safer if expectations leave little margin for error. My aim is to distinguish operational progress from a stock price that already assumes it.

04 / THE FED’S ROLEA hold can help, but it is not a buy signal on its own

The Fed raised its target range by 25 basis points to 3.75–4.00% on September 16, citing elevated inflation. Its next scheduled meetings are October 27–28 and December 8–9. [2][3] My working expectation is an October hold, giving policymakers time to assess incoming information. This is my judgment, not a measured market probability or an announced decision.

I would not infer a hold merely because the Fed hiked in September. Consecutive hikes remain possible if the evidence warrants them. The equity question is how the decision and guidance compare with what investors already expect, and how bond yields respond.

A hold accompanied by easing inflation and resilient growth could support equities. A hold alongside persistent inflation could leave long-term yields elevated and valuations under pressure. Cuts prompted by a sharp economic slowdown could also coincide with weaker profits. For my equity thesis, the reason rates change matters as much as the direction.

HOW I READ THE SAME FED HEADLINEConceptual channels · Kevin Lu’s analysis
HOLD
Inflation eases + demand holdsLess rate pressure → more room for earnings to support stocks
Inflation persists + yields riseHigher valuation hurdle → earnings growth may not lift prices

05 / WHAT THE NUMBERS WOULD REQUIREThree ways the year could play out

The examples below isolate earnings growth and valuation. They start from a hypothetical 19× multiple, using FactSet’s dated reading as a reference. The earnings changes and ending multiples are my illustrative assumptions. They are not consensus targets, assigned probabilities or statistically calibrated forecasts.

CENTRAL CASE · 12 MONTHS+10.0%

Profits carry the return

EPS grows 10%; the multiple stays at 19×. Demand holds, margins remain resilient and long yields do not reset sharply higher.

UPSIDE CASE · 12 MONTHS+24.1%

Growth earns a higher price

EPS grows 15%; the multiple reaches 20.5×. Better cash generation, broader upgrades and less rate pressure strengthen confidence.

DOWNSIDE CASE · 12 MONTHS−21.8%

Both supports weaken

EPS falls 10%; the multiple drops to 16.5×. Slower demand hurts profits while inflation or risk concerns reduce what investors pay.

Arithmetic: ending price relative to starting price = earnings growth factor × ending P/E ÷ starting P/E. For example, 1.15 × 20.5 ÷ 19 − 1 = +24.1%. These are price changes, excluding dividends, fees and taxes. The central case is my working illustration, not a promise or a probability-weighted expected return.

Why use 10% in the central illustration? I want a positive case that does not simply extend an unusually strong quarterly growth rate into the future. FactSet’s October 16 Q3 figure is a year-over-year comparison, not the growth in forward earnings from today. My 10% is a separate assumption. It would need to be revised if the evidence for future profits weakened. The downside is deliberately meaningful: profits and valuations can fall together.

06 / WHAT WOULD CHANGE MY MINDFollow revisions, breadth and the cost of capital

I would become more positive if earnings upgrades spread across sectors, revenue and cash flow support the reported profits, and a broader set of stocks participates without a sharp rise in long-term yields. I would reduce conviction if estimates are repeatedly cut, cash generation falls behind reported growth, or the market becomes increasingly dependent on a few leaders.

The next earnings reports are therefore checkpoints, rather than the whole investment horizon. I would compare new guidance with the assumptions recorded here, then revisit the view after the October Fed meeting and as the next quarter’s outlook becomes clearer. A change in price alone would not tell me whether the business case improved.

My conclusion today is to stay engaged with equities while keeping a price discipline. I see a credible path higher over six to twelve months, led by earnings and wider participation. I would rather build conviction from improving evidence than rely on a single Fed decision to make the market work.

THE VIEW IN ONE SENTENCEI am selectively constructive on U.S. equities, with earnings delivery and broader leadership as the case for upside, and rising yields or falling profit expectations as the clearest reasons to reassess.

Sources & research notes

Published October 21, 2026. Original synthesis and perspective prepared for Kevin Lu Research using the sources below. Source observations retain their stated dates. The outlook, sector preferences and scenario assumptions are judgments, not reported facts. This article complements Note 006’s earnings guide and Note 008’s valuation explainer.

  1. FactSet · S&P 500 Earnings Season Update, October 16, 2026John Butters. Early reporting sample, blended Q3 growth, earnings surprises, forward P/E and historical comparison. All FactSet figures here are dated October 16; none are labeled as October 21 observations.
  2. Federal Reserve · September 16, 2026 FOMC statement25 bp increase, 3.75–4.00% target range and inflation assessment. The October hold view is the article’s judgment.
  3. Federal Reserve · FOMC meeting calendarOctober 27–28 and December 8–9, 2026 meeting dates, verified October 21.