Stock market gains in 2026 have been impressive, even through the volatility, causing some investors to question whether the market has moved too far, too quickly. But perhaps the more important story, or the more important metric to focus on, is the strength of corporate earnings. With profit estimates continuing to rise, many analysts have determined the current advance appears to have a solid fundamental foundation. So today’s weekly market commentary discusses whether corporate earnings are potentially strong enough to support a continued rise in the equity market.
The enclosed chart plots the change in the calendar year earnings estimates for the S&P 500 Index. Within the graph, there are two data sets tracked. The first is the average change of those estimates over the last three years, which is represented by the light blue line. And the second is the change of those estimates just in 2026, which is represented by the dark blue line. As can be seen from the graph, the trend over the past three years is for earnings estimates to decline over the course of the year by approximately 3%. This has typically been a function of analysts beginning the year with optimistic forecasts then lower them as the year progresses. And then by the end of July, when Q2 numbers have been reported, the chart shows that estimate decline of approximately 3%.
Looking the the 2026 figure, however, the chart shows the opposite. Earnings estimates this year have risen 15% since the start of the year. As the piece states, “companies continue to clear a rising earnings bar, prompting analysts to raise their full year estimates, with S&P 500 earnings now on pace to grow roughly 25%. According to our research, this would be one of the strongest years of non-recessionary earnings growth in several decades. We believe the AI buildout has been an important contributor, turning spending on data centers, chips, and power into revenue for companies supplying them.” – AOM 486
Importantly, the piece also explains that through July 31, 2026, the S&P 500 gained approximately 13%. But because expected earnings rose slightly faster than stock prices, the market’s forward price-to-earnings ratio declined from approximately 22.0x earnings to 19.6x earnings.
In terms of what that means for investors, as the piece states in the close, “while the S&P 500 trades around 19.6x forward earnings, above its 20-year historical average, net profit margins sit at a record 16.4%. The historical relationship between the two variables suggests that the P/E should be closer to 23.0x, all else equal. By these measures, we believe the market remains reasonably priced, supported by the rising profits that have historically carried stocks higher.” – AOM 486
We would ask that you review the attached piece at your convenience and please let us know if you have any questions or if you would like to discuss it further. And as we always end this correspondence, please remember that regardless of current momentum and regardless of the key takeaways in this weekly perspective, we will continue to monitor and manage with a thoughtful approach based on your specific long-term objectives.
