Executive summary

1. Analysts expect better breadth in 2027 earnings.
    
2. Fundamentally, rates cut against this; the tech space tends to have lower debt than other areas with improved earnings expectations.
    
3. Let’s not oversell it — rates alone are unlikely to undo trends in corporate earnings.
    
4. Still, it’s worth treading carefully in areas with heavier debt levels.

I am so sorry. This month, it’s yields again. I’m sick of it, too.

It can’t be helped. It’s the climate we’re in, folks!

But fortunately, not just yields. Here’s the angle: Do higher yields get in the way of expected earnings breadth?

Let’s level set. As shown in the Chart of the Month below, analysts expect normalizing earnings growth in 2027, with more even growth across sectors.

This expectation is a contrast to 2026, when growth concentrated in AI companies, most obviously in technology and some of the Mag 7 names — but also across the broader AI supply chain that shows up in small caps, industrials, and hyperscaler haunts like communication services.

For what it’s worth, market breadth in the U.S. feels like an asymptote. It seems every December, strategists (such as yours truly) describe the upcoming year as one for greater breadth in the U.S. market, but each year, it remains largely a technology story. (Point of order: I’ve been wrong plenty, but market breadth has never been my siren song!)

Does the analyst community have a stronger case to make in 2027? Perhaps. In 2026, a not-insignificant portion of the earnings growth came not from operations, but from investment returns. Take Alphabet. In Q2 2026, it reported an earnings growth rate of nearly 300% year-over-year. Wowzers.

Hello, AI revolution?

Hmm. Kinda. “Other income” represented the lion’s share of those gains; much of that other income came from investment gains outside companies (SpaceX and Anthropic in particular).

Still AI. True. But hardly the kind of earned revenue from its AI-aggressive capital expenditures that investors are anxious to see.

When you add in the reality that earnings growth next year will need to compare with the remarkable earnings growth this year (the “comparables” that can skew perception in year-over-year analysis), along with concerns around the impact of rising depreciation costs (those chips aren’t cheap!), it’s possible we could see lower growth from the AI arena even with greater monetization.

Again referencing our Chart of the Month, that looks especially true for the Mag 7 and sectors like communication services, where Alphabet and Meta sit. It also looks true for consumer discretionary, which houses Amazon. Technology still looks strong; hardware companies — particularly the chip names — look set to benefit from continued AI spending by the hyperscalers, though even for those companies, estimates have gone down. Case in point: Micron’s 2026 estimated earnings are 888%, falling to an estimated 135% in 2027. Still remarkable. But at least less ridiculous.

Meanwhile, areas outside AI have easier comparables. Healthcare, for example, has had a bit of a miserable earnings year, which should make next year’s earnings pop a bit more. And then there are areas like industrials. While plenty of AI supply-chain companies are in the mix here, analysts also point to defense spending and manufacturing recovery as earnings drivers for the sector.

Small caps are an especially favorite area for the earnings breadth argument, with higher estimates resulting from expectations for economic strength and the AI infrastructure build.

But not every variable points to improved earnings breadth next year.

Rates in particular point the other way. Not because higher yields necessarily derail earnings growth, but because they could make it harder for some companies to deliver on expectations than others. And that distinction matters when the argument is for broader earnings growth across the market.

First, consider the move we’ve seen in 2026. As of October 9, 2026, the 10-year Treasury yield topped 5.2%. That’s more than a full percentage point move from the start of the year, when the expectation was for lower rates over the course of the year.  

Higher rates matter for companies with higher levels of indebtedness, greater floating-rate exposure, and weaker interest coverage. (Hey there, small caps!)

See below. While it’s not a complete picture of rate sensitivity, it helps identify where pressure points may be. On that note, while technology has the lowest leverage profile, consumer staples, real estate, and utilities sit at the higher end.

But while the fundamental reasoning is sound, the historical data doesn’t draw a straight line from the 10-year Treasury to corporate earnings. In fact, when we look at historical periods of a similar move in the 10-year Treasury yield, we find plenty of instances in which earnings continue to compound regardless. One more reminder that we live in a multi-variable — not single-variable — world. 

Be that as may, it’s worth considering why rates have headed higher in today’s environment. It’s not because growth expectations have suddenly accelerated. That would be a positive for earnings expectations. Rather, the higher 10-year Treasury yield reflects questions around supply and demand, fiscal uncertainty, and the future path of rates.  

That distinction matters for earnings, but it also matters for valuations. Even before higher borrowing costs show up in reported profits, investors can start discounting companies that look more vulnerable to them.

And it appears they have. Since mid-August, as worries about structurally higher long-term rates grew, we’ve seen investors shift their preferences in favor of sectors and companies that face less pressure from higher yields. Take a look below. The companies that appear to have suffered the most between August 15 and October 8 are those with higher debt levels.

Of course, in the near term, this performance dispersion could be an opportunity for parts of the equity market that have sold off. The 10-year U.S. Treasury climbed half a percentage point in September alone. At least part of that move could be excesses that dissipate if rate policy appears priced in or geopolitical risks decline, giving equities that sold off a bit more breathing room.

Still. Particularly because of the supply-and-demand dynamics in the current climate — not to mention uncertainty around inflation and rates —  I’d argue we’re looking at structurally higher yields than what we saw in the post-global financial crisis era.

That makes the balance sheet — and debt in particular — a reasonable consideration for investors looking for companies well positioned for the current regime. In my view, a good starting point for opportunity may be industries with reasonable valuations, strong fundamental momentum, and lower levels of debt.

Here’s the takeaway

A broader earnings environment doesn’t necessarily mean a level playing field. Particularly when it comes to debt.

While it’s hard to argue that higher rates in and of themselves will be the undoing of 2027 expectations, they can certainly weigh on areas of the market that rely more on debt to fund their businesses. I’d pick my small caps carefully.

What else am I watching? In the immortal words of Elon Musk: Yikes. The CoreWeave situation. And earnings and the Treasury curve. Within earnings, it’s not just the AI trade that’s top of mind for me.

As earnings season unfolds, I’m particularly curious about the state of the consumer. I’ve thought the consumer is no better than resilient, but some point to consumer spending as a sign that the economy outside AI is humming. Will be nice to see some fundamental details there.

And then there are the midterms. Here’s my hot take: They don’t really matter to markets. OK, fine. On the margin. Companies need certainty, policy matters, etc. But it’s a circuitous journey from Washington to Wall Street — and I’m more concerned about what’s happening with valuations and earnings than I am with the inner workings of DC.

And this from an ex-bureaucrat!

Until November.

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