Understanding Earnings are Driving This Bull Market

One of the most important questions investors should ask during any market rally is; what’s driving stock prices? Are prices rising because investors are willing to pay higher valuations (price to earnings expansion), or are companies producing stronger earnings that justify advances? The distinction matters.

The accompanying chart from BMO Capital Markets provides a remarkable perspective. It breaks down the annual returns of the S&P 500 into two components: returns generated by corporate earnings growth and returns generated by changes in valuation (P/E expansion).

While markets often experience years where enthusiasm and subsequently higher valuations account for much of the gains, 2026 stands out. Currently nearly 100% of the S&P 500 YTD return has been driven by earnings growth. That’s an exceptionally healthy foundation for markets to be able to continue their advances.

When earnings drive equity returns, companies are creating measurable economic value. Translated, businesses are selling more products, improving profit margins, investing in new technologies, and generating higher cash flows. Those increasing fundamentals eventually work their way into higher stock prices.

By contrast, markets driven primarily by expanding valuations rely more heavily on investor optimism and even speculation. Valuation expansion can certainly fuel impressive returns, but it’s often less durable as the expectations eventually become difficult to satisfy.

With Q2 earnings in the rearview mirror and investors focusing on Q3 & Q4 2026 results, analysts are calling for earnings growth rates of 27.4% and 25.2%. For FY 2026, Wall Street analysts are predicting (year-over-year) earnings growth of 29.1%. ⁽¹⁾

This extraordinary pace is seldom seen outside of recoveries following major recessions. What makes today's environment unique is that earnings were already growing before the current acceleration began. Today’s current earnings growth isn't simply a rebound from depressed levels; it represents genuine expansion across corporate America.

Earnings growth is a much broader story than
one concentrated in a handful of tech names

While much of the financial media focuses almost exclusively on the "Magnificent Seven" technology companies, and for good reason; their estimated earnings growth of roughly 46% remains extraordinary. However, the more important story is that the other 493 companies in the S&P 500 are expected to grow earnings by approximately 23%. Additional optimism can be gathered from the fact that all eleven sectors of the S&P 500 are reporting year-over-year growth in revenues through the first half of 2026.

Several forces are contributing to this strength. Continued capital spending on artificial intelligence infrastructure, cloud computing, semiconductor manufacturing, energy infrastructure, and data centers is creating ripple effects throughout the economy. At the same time, supportive fiscal policies and previous monetary stimulus continue working their way through corporate balance sheets, allowing businesses to invest, utilize technological advancements and expand at today’s current pace.

This Learning Spotlight serves as an important
reminder that markets ultimately follow earnings

Headlines, politics, geopolitical events, and investor sentiment can all create short-term volatility, but over time, corporate profits remain the primary driver of stock prices. An adage that has stuck with me over the years is that earnings are the mother’s milk of the equity markets. Earnings fuel, nourish, feed and help develop the next level of price advances.

At WT Wealth Management, we continually emphasize looking beyond the daily headlines to understand the underlying fundamentals shaping the markets. History has shown that a market supported by broad-based earnings growth is generally built on a far stronger foundation than one fueled solely by expanding valuations.

The WT Wealth Management Learning Spotlights are designed to inform, inspire, and foster meaningful dialogue between our clients and the WT Wealth Management team. Our goal is to demystify complex economic and investment topics, offering clear, practical insights that connect financial theory to real-world decisions.

SOURCES

https://www.factset.com › earningsinsight

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