KBRA Financial Intelligence

3 Things in Credit: Earnings Momentum, 2026 Forecasts, and August Jobs

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Welcome, market participants, to another 3 Things in Credit. I’m Van Hesser, Chief Strategist at KBRA. Each week we bring you 3 Things impacting credit markets that we think you should know about.

We found Bloomberg’s interview this week with Treasury Secretary Bessent to be interesting. Here are two bits that capture the challenge this administration faces.

“In [Bessent’s] view,” the piece says, “the problem stems from decades of U.S. policy that prioritized cheap imports and thus allowed China, Southeast Asian nations and even European countries such as Germany to game the global trading system. ‘In the old days they’d sell us a Sony Trinitron, and we’d sell them a GM,’ he says. ‘As we deindustrialized and financialized, we’d sell them private equity, we’d sell them Google stock, or we’d sell them Treasuries. All of that has distributional effects. You end up with the coasts very rich and everybody in the middle less rich.’”

Then there was this bit from Steve Mnuchin, his predecessor under Trump 45, speaking on the challenge of reducing the deficit after passage of the One Big Beautiful Bill: “In Trump 1.0 it was easier to grow our way out of the tax cuts,” he says. “We had lower interest rates, smaller deficit, smaller debt. Now you have higher interest rates, bigger deficit, bigger debt.”

Important context.

This week, our 3 Things are:

1. Earnings momentum. What’s underneath Q2’s double-digit growth headline?

2. 2026 forecasts. Here’s the early read on what forecasters think lies ahead.

3. August jobs. It will likely be the most consequential data release this year.

Alright, let’s dig a bit deeper.

Earnings momentum.

This was supposed to the be the earnings quarter reflecting adjustment to a new administration and its disruptive-by-design policies on trade and on immigration. Earnings growth, using the S&P 500 as our universe, was expected to plummet from 13.6% in Q1 to 2.5% (Bloomberg consensus) in Q2. We described the expected falloff to be a function not only of policy change (and its overhang of uncertainty) but also normalization—the ongoing correction (now nearing its completion) from the extremely accommodative fiscal and monetary response to COVID.

With the current earnings growth rate sitting at 10.5% among the 452 companies that have reported (90% of the index), the narrative thus far has very much been of the “better-than-expected” variety, coupled with “See, U.S. exceptionalism is not dead, and the tariff impact has not been as bad as forecast.”

Let’s peel that onion a bit.

One, we agree, U.S. exceptionalism is not dead. U.S. innovation has been driven by an extraordinarily successful public/private partnership between best-in-class universities and the business community and the world’s most effective capital markets. U.S. capital markets have been better than other systems at funneling capital to its most productive use, while at the same time unleashing capitalism’s creative destruction, i.e., cutting off resources from poorly performing and zombie firms.

Two, we would agree that the tariff impact has not been as bad as forecast. But we would add … “yet.” The impact has not been felt anywhere near what is likely to be the full effect for a couple of reasons. One, companies have successfully maneuvered to minimize tariff impact by building inventories and, for lack of a better way to describe it, scrambling to avoid or minimize. But there is a limit as to how much of that is sustainable. And two, shipping and manufacturing production is a process that takes a while (four to six months) for many products to make it to market. We did not expect the full tariff impact to hit until Q3 and Q4 earnings.

But here is what we are seeing in Q2 earnings. Slowdown. If we set aside sectors that typically are less reflective of economic dynamism such as financials, real estate, and energy, and then set aside technology sectors (communication services and information technology), we get to a “core” set of sectors. And here, the earnings numbers start to underwhelm. Earnings growth in consumer discretionary is currently +3.6% year-over-year; consumer staples, -0.2%. Industrials are +2.2%; materials, -3.4%. Utilities at +5.0% and health care +7.8% are a bit better, but still relatively modest.

Looking ahead, analysts are forecasting growth for the S&P 500 of 6.6% and 6.7% in 2025’s Q3 and Q4, respectively, before expecting growth to revive meaningfully in 2026 back up to 12.3%. Given the state of flux (and uncertainty) that will become even more pronounced, we think, in the second half, that forecast strikes us as overly optimistic, or overly dependent on technology (and probably both).

Alright, on to our second Thing—2026.

Is it too soon to think about 2026? Of course not. Soon, we’ll start to flip the calendar when we think about earnings multiples. And those one-year forward looks at things like recession probabilities and inflation expectations already take into consideration the first half of 2026. Look, if you’re having a hard time just getting through the 24-hour news cycle, we hear you. But time marches on.

Let’s start with U.S. economic growth. The Bloomberg consensus calls for the slightest of pickups, from 1.6% estimated for 2025 to 1.7% in 2026. Just two of Bloomberg’s 70 respondents see growth coming in less than 1%, while 14 (that’s 20% of the total) expect growth to exceed 2%. The Bloomberg consensus happens to be close to the Fed’s longer-run estimate (1.8%) published most recently in its June Summary of Economic Projections. Speaking of which, the Fed’s estimate for 2026 GDP growth (Q4 to Q4) is 1.6%.

Inflation is expected to fall over the course of the year, according to the Bloomberg consensus, with core PCE dropping from 3% in Q1 to 2.3% by Q4. The Fed sees core PCE dropping to 2.4% by 2026’s Q4.

Monetary policy is expected to ease in 2026, with the policy rate among the Bloomberg consensus expected to fall another 62 bps in 2026 (on top of 43 bps in Q4 2025), while the 10-year Treasury is expected to remain range-bound, trading between 4.16% and 4.25%, using the quarterly averages over the course of the year.

In terms of corporate earnings, bottoms-up consensus for the S&P 500, according to Bloomberg, is calling for EPS of $303; that’s growth of 12.3% on revenue growth of 6.1%. Top down, the strategists’ view is a bit more conservative, with the median estimate calling for EPS of $290. The median price target among surveyed strategists by Bloomberg is 6700, 4% higher than where we are today.

Naturally, the individual consensus forecast components don’t always fit together elegantly. For example, you would think 12% earnings growth might grow the S&P 500 by more than 4%. And you might not think below-potential growth would result in 12% earnings growth. The more telling read here, in our opinion, is that there remains considerable uncertainty—on policy, on geopolitics—to forecast anything other than more of the same with any degree of conviction. It is, after all, tough to model politics.

Until proven otherwise, there is a belief among investors that tariffs are not that impactful, inflation is under control, and geopolitical developments are mostly noise. The fourth quarter might change that. As might 2026, as we are facing uncertain macro anchors on which the U.S. economy historically has rested, namely, U.S. geopolitical hegemony, rising globalization, fiscal discipline, central bank independence, high-quality national accounts data. These collectively helped to define standards by which long-term economic and investment performance oriented. One thing we do know about 2026: It will be a year of discovery of how a redefined macro environment ultimately drives growth and earnings.

Alright, on to our third Thing—August jobs.

Earnings? Out of the way. CPI? Out of the way. China tariff negotiation? Extension in hand, out of the way. For what we can see (and who knows what we can’t), it’s clear sailing until … August jobs.

Think about the drama surrounding this release, due out of September 5:

• It will be the first release out under the new head of the BLS.

• It comes on the heels of July’s shocker, where the three-month rolling average plunged from 150,000 to 35,000.

• It comes just a week before the FOMC meets.

Heading into the release, it is clear that the respective risks in the Fed’s dual mandate have shifted hard toward growth (maximum employment) and away from inflation (price stability). While it is approaching a foregone conclusion that the Fed is ready to cut in September, what hangs in the balance is the magnitude and pace of future rate cuts. And that will be dependent on whether or not the central bank’s mindset shifts from “We’ve tamed inflation, let’s bring rates back to neutral” to “We need to stimulate!” Should August jobs rebound, say, up toward 100,000 the former takes hold. Alternatively, if we follow the July shock with another weak (<75,000) print, the latter takes over.

Leading up to the July jobs release, investors seemed to ignore all of the signs of slowdown happening around them. That probably had to do with better-than-expected earnings and progress on trade deal frameworks. Meanwhile, the soft data had been negative for some time, and increasingly, the hard data was catching up. Jobs growth was the outlier that suddenly corrected.

We continue to stress that risk markets are priced for perfection in an imperfect world. August jobs may change that.

So, there you have it, 3 Things in Credit.

1. Earnings momentum. Get passed tech strength, and you see slowdown.

2. 2026 forecasts. More of the same, which strikes us as we need more data to call turns.

3. August jobs. Kickoff to what figures to be a volatile Q4.

As always, thanks for joining. We’ll see you next week.