WHAT IS PROPPING UP THE MARKET
Interest rates are rising to levels not seen in decades. Inflation continues to run ahead of the Fed target of 2%. The Fed has recently entered a tightening cycle with the recent rate increase of one quarter of a percent. Another increase is expected sooner rather than later.
Consumer confidence just dipped to a 12 year low. Energy prices are 30% to 40% higher than they were a year ago. Prices at the gas pump are creating pain for consumers.
More and more people are now talking about a significant market correction as a result.
Yet, the stock market is still hovering near all-time highs. How can this be?
Well, there is lots of good news. And some of it is extraordinary.
First, corporate earnings are growing at record levels. Earnings are the main driver of stock prices. The table below compares recent earnings growth of the S&P 500 to both 10-year and historical averages.
I also include a column showing the median earnings growth of the 500 companies in the index. Since the S&P 500 has always been “top-heavy” with the biggest and fastest growing companies driving the total index, the median is typically 40% below the total number for the S&P 500.
The median statistic provides a better indication of what is happening in most companies. In recent years, the mag-7 stocks have been responsible for much of the gains in the entire S&P 500.
Earnings over the last ten years are roughly 40% higher than the historical average (50 years). The earnings data supports above average returns over the last ten years. The S&P 500 index has gained an average of 15% over the last ten years – 50% more than the earnings growth rate would support.
The 2025 results are another 10% above the strong average returns for the last ten years (11% vs. 10%).
Earnings growth in 2026 has accelerated even further. Adjusted earnings growth for the first half of 2026 is over two times the 2025 level. In the past, S&P 500 earnings have only grown at rates above 20% following years of earnings decreases. The 26% growth rate in the first half of 2026 is unprecedented.
EARNINGS GROWTH - S&P 500
Period | S&P 500 | Median Company |
50-Year Average | 7% to 8% | 4% to 5% |
10-Year Average | 10% to 11% | 6% to 7% |
2025 | 11% to 12% | 8% to 9% |
First Half 2026 | 25% to 27%* | 12% to 14% |
Actual earnings growth for first half 2026 is over 40% but this includes some large capital gains for both Amazon and Alphabet. The adjusted figure removes these one-time events.
Notice how the median earnings growth for the S&P 500 is also accelerating to record levels in 2025 and 2026. It is not just the big tech companies that are generating record profits. Most of the companies in the S&P 500 are posting huge productivity increases.
This productivity growth is not due to the impact of AI whose productivity effects have yet to be felt in a material way for large US companies. If the AI optimists are correct, corporate productivity and profits will increase significantly going forward. Jobs and employment would also be affected, however.
The impact of AI is affecting revenue growth and GDP growth due to the massive spending on AI infrastructure. If that spending slows, the overall economy and the stock market will take a big hit. But there are no signs of AI spending slowing at this point.
Keep an eye on reports about the impact of AI on business productivity. AI spending is currently based on the expected future impact of AI. We are all waiting for proof - actual use cases demonstrating a return on AI investments.
CONCLUSION
One could argue that the stock market should be rising even faster than it is at present. Earnings growth indicate that stock prices could be rising by 25% or more.
The war, oil prices, inflation and interest rates are holding back stock prices.
If a diplomatic breakthrough happens and the fighting stops and oil begins to flow again, the market could see big gains from here. There are no easy answers to the crisis in the Middle East, unfortunately.
The medium term to long term outlook for stocks is highly dependent on AI spending, AI benefits and the situation in the Middle East.
As always, your investments need to be positioned for all market scenarios – rapid growth, market downturns and flat markets. My Growth & Safety fund wins when markets climb and when markets decline. If you would like to learn more about how my strategy could fit into your portfolio, click the link below to schedule an appointment.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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