Priced Before It’s Visible: The Upside Everyone’s Missing

Priced Before It’s Visible: The Upside Everyone’s Missing

• Invest for what S&P 500 earnings growth looks like a year down the road.

• Wall Street expects CY2027 earnings of $343.

• That gets me to a year-end target of 7,900.

Markets don’t need perfect sightlines—they price in what’s coming…

Many of the pundits on financial networks like CNBC and Bloomberg never cease to amaze me. Time and again, they rant and rave about how the stock market isn’t connected to the real world. They can’t understand why indexes—or the shares of individual companies—are going up while the world around them is steeped in uncertainty. These talking heads get so caught up in gloom‑and‑doom scenarios that they can’t see the forest for the trees.

You see, great investors aren’t focused on the moment. They’re discerning what the environment will look like a year down the road. They know that today’s uncertainty eventually gives way to tomorrow’s predictability. By staying disciplined and investing for that outcome, those with foresight can sell to others who will be chasing the same opportunities 12 months from now.

With a new year underway and the stock market making new highs, the pundits are once again questioning the rally. They don’t seem to grasp that the artificial intelligence capital‑expenditure cycle—along with the pending tax breaks from Congressional legislation passed last year—should boost margins and spending. As a result, they’re missing the upside potential in the economy and the market over the next year.

Well, with fourth‑quarter earnings results right around the corner, analysts have raised their expectations for profits and outlooks. According to financial data provider FactSet, S&P 500 Index calendar‑year 2026 earnings estimates have jumped from $300 to $310 over the last six months. At the same time, Wall Street anticipates earnings could hit almost $343 in 2027. Based on my math, those estimates imply the S&P 500 could rally another 12% by year‑end.

But don’t take my word for it, let’s look at what the data’s telling us…

Coming into the third quarter, analysts were conservative in their earnings expectations. At the start of October, they predicted S&P 500 companies would report combined growth of 7.9%. That forecast came up short. With earnings now in the rearview mirror, growth came in at 13.4%...

A big driver of the upside was the adoption of AI. Financial behemoths like JPMorgan, Goldman Sachs, and Bank of America said they’re increasingly deploying the technology across all platforms. They’re already seeing efficiency gains—JPMorgan CEO Jamie Dimon said they’ve saved $2 billion by investing in the technology, and he believes that’s just the tip of the iceberg. Both Goldman and Bank of America said they’re already seeing a boost to productivity.

That spend is helping power demand and margins for the goods and services offered by major technology companies. Microsoft, Nvidia, Apple, and Intel all reported better‑than‑expected results, driving the sector’s earnings upside. Yet several of these management teams said they can’t keep up with demand. As a result, their earnings power is being constrained as they race to build out capacity to meet customer needs.

The Technology and Financials sectors account for around 47% of S&P 500 earnings power combined. When we include Communication Services (Alphabet and Meta), the number jumps to about 60%. That’s important—because the companies with the greatest ability to drive the index’s earnings higher are expected to experience margin expansion. In other words, the broader index’s expectations need to go up.

As I said at the top, at the end of the second quarter, analysts predicted calendar year 2026 earnings of $301 and calendar year 2027 earnings of $341. Now, those numbers have risen to $310 and $343, respectively…

Now let’s apply a suitable price‑to‑earnings multiple to estimate fair value. Considering roughly 33% of the index’s weighting is technology, I believe we should use a blended multiple: 30x for growth and 19x for the rest. That gets me to a weighted fair‑value multiple of roughly 23x earnings.

Remember, we want to invest today based on what earnings potential will look like 12 months from now. So, by the end of March—after fourth‑quarter results are complete—the market should be priced based on the full‑year 2026 numbers. Multiplying our fair‑value multiple of 23x by the forward 12‑month earnings estimate of $310, we get a price target of 7,130 for the S&P 500, about 3% above yesterday’s close.

But let’s take it a step further. Considering it’s early January, we still have the whole year ahead of us. By the end of 2026, the S&P should be trading based on the CY2027 earnings estimate. Using the same fair‑value math, I get to a target price of 7,900—or 13% higher than current levels.

Look, the market isn’t irrational, it’s early. The road ahead is always going to be filled with uncertainty. But while the pundits wait for clarity, disciplined investors are already positioning for what’s next. With earnings power accelerating and AI driving margin expansion, the S&P 500 isn’t topping out—it’s gearing up. Invest in the road ahead.

Five Stories Moving the Market:

Government officials in Caracas and Washington, D.C., are discussing exporting Venezuelan crude to refiners in the United States, a deal that could divert supplies away from China while helping state company PDVSA avoid deeper output cuts – Reuters. (Why you should care – an increased supply of Venezuelan oil for U.S. refineries could help bring down prices at the pump, weighing on inflation)

Index provider MSCI shelved a controversial plan that could have ejected crypto-heavy firms like Strategy from major indexes but signaled a broader crackdown may be coming; MSCI announced plans to launch a “broader consultation” on how non-operating companies should be treated – Bloomberg. (Why you should care – the announcement is likely to cause a short-term cover rally in crypto-treasury companies like Strategy but the longer-term hurdle remains)

Australia’s core trimmed mean inflation gauge advanced 3.2% from a year ago, easing from 3.3% and matching economists’ expectations, according to data from the Australian Bureau of Statistics; the headline CPI rose 3.4% in the 12 months through November, versus a forecast 3.6% increase – Bloomberg. (Why you should care – the weaker-than-expected result should ease pressure on the Reserve Bank of Australia to raise interest rates)

Chinese demand for Nvidia’s H200 advanced artificial-intelligence processors is “quite high,” according to Chief Executive Jensen Huang; he stated the company is getting the last details of the U.S. licensing agreement sorted out – WSJ. (Why you should care – Huang had previously said it could be difficult to keep up with current Chinese demand for H200s, likely boosting the earnings outlook when Nvidia reports in late February)

Federal Reserve Bank of Richmond President Thomas Barkin said further changes to the Federal Reserve's short-term interest rate will need to be "finely tuned" to incoming data given the risks to both the U.S. central bank's employment and inflation goals – Reuters. (Why you should care – while Barkin is not currently a voter, his commentary aligns with other officials saying the central bank should give recent rate cuts time to play out)

Economic Calendar:

Australia – CPI for November

Japan – Au Jibun Bank Japan Services, Composite PMI (Final) for December

Germany - Retail Sales (YoY) for November (2 a.m.)

France - Consumer Confidence for December (2:45 a.m.)

Germany - Unemployment Rate for December (3:55 a.m.)

Eurozone – CPI (Preliminary) for December (5 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

U.S. – ADP Nonfarm Employment Change for December (8:15 a.m.)

U.S. – Durable Goods, Factory Orders for October (10 a.m.)

U.S. – ISM Non‑Manufacturing PMI for December (10 a.m.)

U.S. – JOLTS Job Openings for November (10 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

Treasury Auctions $70 Billion in 5-Year Notes (1 p.m.)

Fed’s Bowman (Board Member) Speaks (4:10 p.m.)