Solid second-quarter earnings provided a fillip to the U.S. equity market despite political turmoil both at home and abroad. A similar shot in the arm is expected in the third quarter, with American corporations showing signs of strength on the back of an improving economy.

Both manufacturing and service sectors accelerated at a record pace in September, while the U.S. economy is growing close to the range expected by President Trump and some other Republicans. A clearer view of last month’s labor market data shows that keeping the effects of the hurricane aside, U.S. employment scenario is continuing to tighten.

The third-quarter earnings season, unofficially, begins mid-October. It is seen as the biggest catalyst for the broader markets that could help major indices continue their winning streak. Thus, for the next few weeks, let us keep an eye on stocks that are likely to make the most of the third-quarter earnings season. Here, we should also bear in mind that better-than-expected earnings performances generally lead to a rally in the share price, which eventually enthralls almost everyone, right from the top brass to research analysts (read more: 5 Top Large-Cap Earnings Growth Stocks to Buy Now).

Q3 Earnings Outlook

Earnings have been pretty strong so far this year. Earnings growth in both the first and second quarter for the S&P 500 companies was in double-digits. Morgan Stanley (MS- Free Report) expects such companies to top forecasts in the third quarter as well, which will take the S&P 500 closer to the 2,575 mark by the end of October. The benchmark index is currently trading at around the 2,544 mark. Morgan Stanley’s forecast would mean additional gains of 1.2% by the end of the month. Further, the banking giant expects the broader gauge to end the year at around 2,700.

Total third-quarter earnings are expected to be up 2.2% from the same period last year on 5% higher revenues. Expectations of earnings may not be excessively high, but, still looks solid as economic indicators shows positive signs.  

Strong Economic Backdrop

A key yardstick of manufacturing activity in the United States scaled a 13-year high in September, while non-manufacturing activity rallied to a 12-year high. According to the Institute of Supply Management (ISM), the manufacturing index climbed to 60.8% in September from 58.8% in August. The non-manufacturing gauge was at 59.8% last month, as compared with 55.3% in the prior month (read more: U.S. Manufacturing Activity Hits 13-Year High: Top 5 Winners).