Despite war, inflation, and a hawkish Federal Reserve weighing on sentiment, the S&P 500 has delivered a surprisingly strong performance in 2026.
The broader benchmark index is up nearly 12% year-to-date as of September 19, extending gains from two consecutive spectacular years in 2023 and 2024.
Investors have had no shortage of reasons to be pessimistic, with the ongoing Iran war driving elevated oil and gas prices that squeeze both consumers and businesses.
Persistent inflation concerns, soaring bond yields, and broad uncertainty around artificial intelligence have added further layers of complexity to an already difficult market environment.
Yet through all of that turbulence, the S&P 500 has continued to grind higher, and the reason comes down to a single underlying driver: collective earnings growth.
FactSet Senior Earnings Analyst John Butters noted in a September 11 report that S&P 500 earnings are projected to grow 28.7% in the third quarter ending September 30.
That figure would mark the third consecutive quarter in which the index has generated at least 25% annual earnings growth, a streak that has given the market a powerful fundamental foundation.
Butters also noted that third-quarter earnings growth estimates have been revised upward from 26.6% as of June 30, reflecting growing analyst confidence in corporate profitability.
At the time of Butters’ note, the S&P 500’s forward one-year price-to-earnings ratio stood at 19.1 times, below its five-year average of 19.8 times, making valuations look relatively attractive.
A research note from a team of market strategists led by Truist’s Keith Lerner highlighted that technology stocks, a major component of the index, have undergone a significant valuation reset.
The State Street Technology Select Sector SPDR ETF, which holds major tech and AI stocks including Nvidia, Apple, and Microsoft, has seen its forward earnings multiple fall from 32 last October to roughly 21 now.
“There are still risks and open questions around circular financing and the pace of new model development,” Lerner stated in his note, cautioning that uncertainty in the AI sector has not disappeared.
“Yet, with tech’s relative valuation premium down to approximately 9%, near the lowest level of the past decade, the sector appears to be reflecting at least some of that uncertainty,” Lerner added.
When earnings expand but stock prices lag, it creates potential upside, as the market may not have fully priced in the additional earnings power of the index.
Bond yields remain high and the Federal Reserve has maintained a hawkish stance, both of which could increase borrowing costs and weigh on economic momentum going forward.
Higher oil prices linked to the Iran conflict continue to act as a drag on consumers and businesses alike, adding a persistent headwind that could chip away at future earnings estimates.
Artificial intelligence remains a significant tailwind for corporate earnings, even as questions about the pace of new model development and the sustainability of AI investment persist across the sector.
Analysts and investors alike should closely monitor how Wall Street revises forward S&P 500 earnings estimates, as those revisions remain the clearest signal of where the market is likely headed next.
If strong earnings growth continues to materialize across the index, the S&P 500 has a credible path higher, regardless of geopolitical or macroeconomic headwinds clouding the broader outlook.
