Robust corporate earnings are fueling the US stock market’s climb to unprecedented levels, offering encouraging signals for investors as long as the underlying profit drivers remain intact.
With more than two-thirds of first-quarter earnings reports complete, companies in the S&P 500 are positioned to achieve their strongest quarterly profit growth in over four years. Forward-looking projections have also brightened considerably, with analyst forecasts for the next 12 months climbing more than 10% since January, based on LSEG Datastream data.
As worst-case economic concerns related to Middle East conflicts have diminished, market participants say Wall Street has been able to concentrate on earnings momentum, bolstered by substantial artificial intelligence technology investments and an overall stable economic environment.
“Because things have not gotten worse and the ceasefire has been in place for some time now, it’s been earnings that have driven the move higher,” said Chris Fasciano, chief market strategist at Commonwealth Financial Network.
The S&P 500 benchmark has gained 6% year-to-date, adding to three consecutive years of strong double-digit percentage increases. The index has jumped over 14% since March 30, recovering from a decline triggered by the beginning of the US-Israeli conflict with Iran.
POTENTIALLY STRONGEST QUARTER IN TWO DECADES
While investors anticipated generally positive results when earnings season began last month, actual performance has significantly exceeded forecasts. First-quarter S&P 500 profits are projected to have increased 28.2% compared to the same period last year, incorporating results from 350 index companies that have already reported plus analyst projections for remaining companies, according to Tuesday data from Tajinder Dhillon, head of earnings and equity research at LSEG Data & Analytics.
This growth rate would represent the highest increase since the fourth quarter of 2021, when companies were rebounding from pandemic-related shutdowns.
“Excluding special factors like favorable base effects and corporate tax cuts, earnings growth is arguably the strongest in two decades,” Binky Chadha, chief U.S. equity strategist at Deutsche Bank, said in a note.
Outlook for the remainder of 2026 continues improving as well. Full-year 2026 S&P 500 earnings are anticipated to surge 22.6%, with estimates for each of the next three quarters higher than they were on April 1, according to LSEG IBES.
Major companies yet to report include semiconductor leader Nvidia, retail giants Walmart and Home Depot, and software firm Salesforce.
BEYOND ARTIFICIAL INTELLIGENCE GAINS
Enormous technology company investments in AI applications represent a crucial factor supporting American corporate profits. Five AI hyperscalers are projected to spend $751 billion on capital expenditures in 2026, Goldman Sachs strategists report, as these firms channel resources into data centers and related infrastructure.
Businesses and sectors benefiting from AI have boosted first-quarter earnings by 50%, Deutsche Bank reported Monday, encompassing semiconductor firms and other technology hardware companies, plus electrical equipment and construction businesses.
AI has been “a tree that spreads a lot of limbs out,” said Chuck Carlson, CEO at Horizon Investment Services. “That spending that is going on in that space is really a pretty significant driver.”
Investors also highlight widespread solid earnings amid a steady economic foundation. Median company profit growth reached 12.2%, Deutsche Bank notes, while Morgan Stanley strategists observe the median S&P 500 company earnings surprise is the strongest seen in four years. Nine of 11 S&P 500 sectors are tracking toward higher first-quarter earnings, with eight each up at least 10%, LSEG IBES reports.
Businesses are demonstrating resilience against war-related energy price increases that have pushed oil costs above $100 per barrel, said Keith Lerner, chief investment officer at Truist Advisory Services.
“It’s definitely hurting some businesses, but companies have gone through so many shocks, they are more equipped to just be able to be agile when these things happen,” Lerner said.
MARKET VALUATIONS MODERATE AMID RISING EARNINGS
Strong earnings performance has enabled stock gains even as market valuations have become more reasonable. Though still considerably above its historical average of 16, the S&P 500’s price-to-earnings ratio stood at 21.2 times anticipated 12-month earnings, LSEG Datastream shows. This marks a decline from the 23.5 level reached in late October.
Markets no longer anticipate equity-favorable interest rate reductions this year, given energy-driven inflation increases, creating pressure on stock valuations and heightening the importance of robust earnings growth.
As investors assess whether earnings strength will continue, they will monitor the AI trend and any indication of retreat from industry leaders.
The Middle East conflict remains prominent for investors, who fear more substantial consequences for businesses and consumers as the conflict persists and keeps energy and other costs elevated.
“For the moment, I think investors are willing to sort of ride the wave of strong earnings and generally decent economic news,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management. “Eventually, $4.50-a-gallon gasoline is going to catch up to the economy, you would imagine.”
