Third-quarter earnings season is delivering the usual headline: companies are beating Wall Street's estimates. But the size of those beats is shrinking1, and that shift, more than the beats themselves, is what Horizon Investments' Mike Dickson, Ph.D., is using to separate where expectations have caught up to prices from where they haven't.
The Beat That Isn't Big Enough
With more than 60% of S&P 500 companies having reported, including most of the mega-cap names, aggregate results are running 3.3% above estimates. That sounds like a win, and in isolation it is. But Dickson flags the context: "That's the lowest level in two years." Companies are still clearing the bar, just not by the margin investors have come to expect, and that gap between what was delivered and what was priced in is enough to weigh on stocks even when the underlying numbers are, on their face, fine. This is a market that has been trained to expect growing beats, and a shrinking one reads as disappointment regardless of the absolute result.
AI and Mega-Cap Tech Run Into Their Own Bar
The clearest expression of that dynamic shows up in large-cap technology. Alphabet, Intel, and Amazon shares all fell after signs of softer growth surfaced in key parts of their businesses, even as AI demand broadly remains strong. The issue isn't that AI spending is slowing in any structural sense. It's that AI-exposed names are no longer beating elevated expectations by the wide margins the market had priced into them. When a stock's valuation already assumes exceptional results, "good" becomes a disappointment, and that's precisely the position several of the largest tech names find themselves in this quarter. The implication for positioning is straightforward: broad-based exposure to the AI theme is no longer enough on its own. Selectivity within the group, and some discrimination about which names still have room to beat, matters more than it did a year ago.
Breadth Is Doing the Quiet Work
The more constructive part of the story is happening away from the mega-caps. S&P 500 companies outside the Magnificent Seven are beating estimates by roughly 10% on average, more than triple the pace of the index's largest names. That breadth is showing up in relative performance: the Nasdaq 100 sits 9.5% below its all-time high, the S&P 500 is down 3.3%, and the equal-weight S&P 500, which strips out the mega-cap concentration, is down only 2.2%. The equal-weight index's relative resilience is the tell. Earnings strength outside of tech is providing real support underneath the index, even as the most richly valued names absorb the brunt of the pullback.
Expectations Caught Up, Selectively
Pulled together, the picture is one of a market recalibrating in pieces rather than all at once. In mega-cap tech and AI, expectations had run ahead of what even strong fundamentals can deliver, and the market is now pricing that in. Outside that cohort, earnings are still outrunning expectations by a wide margin, and prices haven't fully caught up to that strength either, just in the other direction. The honest answer to the question the headline poses is that it depends on where you're looking, and increasingly, on being willing to look past the handful of names that dominate the index's headline return.
Five Key Takeaways for Advisors and Investors
- A 3.3% aggregate earnings beat, the smallest in two years, confirms companies are still beating estimates, but the shrinking margin is itself a market-moving signal.
- Weakness in Alphabet, Intel, and Amazon reflects elevated expectations meeting merely strong (not exceptional) results, not a breakdown in AI demand.
- Selectivity within AI and mega-cap tech is now more important than broad thematic exposure, given how much is already priced in.
- The roughly 10% earnings beat posted by S&P 500 companies outside the Magnificent Seven is the strongest argument for broadening equity exposure beyond the index's largest names.
- The equal-weight S&P 500's smaller drawdown (down 2.2% versus the Nasdaq 100's 9.5%) is tangible evidence that market leadership is already shifting beneath the surface.
Footnote:
1 Dickson, Mike. "Have Expectations Caught Up to Prices? It Depends." Horizon Investments, 4 Nov. 2026, www.horizoninvestments.com/have-expectations-caught-up-to-prices-it-depends/.
