After notching another record high Wednesday, the S&P 500 is heading into third-quarter earnings season with unprecedented momentum. The large-cap index recorded its fourth consecutive weekly gain Friday, trading through 2550 for the first time. However, after double-digit EPS increases in the first two quarters of 2017 (14 percent and 11 percent respectively), economists are scaling back expectations ahead of third-quarter reporting.

While consensus shows Q3 will fall well short of the stellar first-half results, U.S. investment bank Goldman Sachs believes the fate of the S&P 500 in the third-quarter lies not just in bottom line numbers. They believe a number of external events will shake up reporting this season. 

Tax Reform

After some failed attempts to overhaul the Affordable Care Act, President Donald Trump, and the GOP have turned their attention to tax reform. While division among the party grows, Goldman Sachs believes there's a better-than-even chance that some form of tax reform will make it through the house, which will help stocks shrug off any disappointing earnings reports. "Our political economist assigns a 65% likelihood that tax legislation will be passed in 2018, which is consistent with market pricing," Goldman Sachs said in a recent note. (Further reading: Trump's Tax Reform Plan.)

"We expect investors will ignore the EPS slowdown given one-time hurricane effects and the focus on benefits from corporate tax reform."

The beneficiaries of proposed tax reform are likely to be the big tech names. Lawmakers have been critical of companies like Apple and Google for not repatriating profits to the U.S. (due to the above average corporate tax rate), but should Trump's tax reform pass it would allow the tech giants to bring profits back to the U.S. at the proposed 20 percent tax rate, below the current 35 percent corporate tax rate. (See also: FAANG Stocks May Lead Market In Last Quarter.)

Financials to Under Perform

While tech stocks are set to shine, Goldman Sachs sees headwinds for financials heading into Q3 earnings. After rising 21 percent in Q1 and 10 percent in Q2, expectations are for negative EPS growth. "The slowdown in EPS growth is forecast to be broad-based, but particularly pronounced in Financials," Goldman Sachs said.

"Weak loan growth and trading activity, along with hurricane related losses, will weigh on Financials' results despite another Fed hike and higher interest rates."

Financials and Consumer Discretionary are the only two sectors expected to report negative earnings growth. 

Take Away

While equities are showing no signs of slowing, Q3 might be their biggest test to-date. Should earnings season beat the street, the S&P 500 will head into the end of 2017 looking to post its seventh consecutive quarterly gain. As usual, the banks will kick off earnings season with Citigroup, JPMorgan Chase, Bank of America and Wells Fargo all scheduled to report at the end of the week. 

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