Priced for Growth, Not Fear

• AI-driven earnings growth is outpacing price gains, compressing valuations.

• The S&P 500's PEG ratio is hovering near 0.8 — among the cheapest in decades.

• This setup has a perfect track record: positive returns 100% of the time.

Cue the bubble headlines…

The stock market finished yesterday just below its all-time high. And I can already hear the headlines writing themselves. The media's about to pound the table and call the technology sector overheated again.

Here's the problem: they're not digging into the bigger picture. As demand for artificial intelligence keeps surging, more money is flowing straight into the hands of the companies that make this technology work.

Just look at Nvidia's fiscal 2027 second-quarter numbers — the company at the center of it all. The graphics processing unit designer reported record revenue of $96.2 billion for a single quarter. That's not even the headline: CFO Colette Kress said sales growth in fiscal 2028 will run 70% ahead of fiscal 2027, because demand isn't slowing down, and margins are expected to hold above 70% despite that pace.

That's the tell. The tech companies dominating the S&P 500's weighting are riding a boom in growth and profitability, and their earnings are growing faster than their share prices — compressing the multiple you're paying for that growth even as the index sits near a record high. That dynamic should underpin a steady rally.

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

Earnings Are Outrunning the Price

Start with the profits themselves.

Back in 2016, the S&P 500 was earning around $120 a share; by 2025, that had more than doubled to roughly $274. Now look at what's coming: Wall Street sees earnings jumping to about $360 in 2026 and $405 in 2027, a nearly 50% surge in just two years.

That's not a typo. It's the AI buildout showing up in the numbers. When Nvidia alone is pulling in $96 billion a quarter and guiding to 70% growth ahead, that money flows through the supply chain and shows up as earnings across the index's biggest weights. Profits are compounding faster than the market can bid up the price to match them.

What "Cheap" Actually Looks Like

Here's where the bubble narrative falls apart. If price were running ahead of earnings, the classic bubble setup, you'd expect the index's price-to-earnings-growth ratio, or PEG, to be climbing toward extremes. Instead, it's doing the opposite.

The S&P 500's PEG ratio — forward P/E divided by long-term earnings growth — is hovering around 0.8, among the lowest readings of the past four decades and in the same neighborhood as the bottoms carved out in 2002, 2009, and 2022. The difference: those readings happened while the market was down and scared. This one's happening near an all-time high.

That's the story the bubble callers are missing. Back in 2000, the PEG ratio spiked above 1.5 because price got way ahead of growth. That's what an actual bubble looks like. Today, growth is running ahead of price instead, which makes the multiple cheaper, not more expensive, even as the index climbs. That's not froth. That's the market being conservative about pricing in growth that's already showing up in the numbers.

The Receipts

Earnings and valuation explain why this setup looks attractive. History tells you what happens next — and this is the part that carries the most weight. Every time the S&P 500 has shown up with this exact combination — a depressed PEG ratio, the index near highs, earnings accelerating — the outcome hasn't been close.

This is the difference between theory and track record. Every instance turned positive within six months and stayed positive out to two years. The average gain builds from 8.7% at six months to 22.5% at a year and 43.9% at two years — and even the weakest instance was still a winner, up 1.8% at six months and 27.6% at two years. Five for five. A 100% success rate. That's not a coin flip dressed up as conviction — that's precedent.

Bottom Line

The bubble crowd will keep pounding the table on valuation, because a record high always feels uncomfortable. But price alone isn't the story, growth is. Earnings are compounding faster than the market is bidding up shares, and the PEG ratio says this market is historically cheap, not stretched. Add it up, and every time this setup has shown up before, the S&P 500 kept climbing for two years afterward, without exception.

None of that guarantees this time plays out the same way. After all, markets don't come with guarantees. But a 100% win rate across five instances isn't noise, and betting against that track record on a headline alone is the riskier trade, not the safer one.

Five Stories Moving the Market:

Finance and human resources software provider Workday reported a nearly 13% rise in revenue, saying its AI solutions were seeing strong adoption and driving ​customer wins, easing investor fears of artificial intelligence disruption to its ‌business – Reuters. (Why you should care – the numbers point to continued demand for enterprise software solutions despite the recent rhetoric around AI destroying demand)

Venezuela is closely examining plans to leave OPEC, delivering a fresh blow to the oil cartel it helped create more than six decades ago; the idea of an exit has been a topic in conversations with U.S. officials, and no final decision has been made – Bloomberg. (Why you should care – leaving OPEC would remove caps from Venezuela’s production abilities)

The Trump administration is in advanced talks with Venezuela for the U.S. to take a direct stake in more than a dozen oil fields that house nearly one-third of the country’s massive energy reserves; if the two countries reach a deal, it could pave the way for independent U.S. energy producers to become involved in oil production in the Latin American country – WSJ. (Why you should care – increased oil production from Venezuela would boost global output and likely weighing on prices)

Marvell Technology failed to provide a meaningful increase to its long-term revenue outlook despite signing a major new AI chip agreement ​with Google; concerns over the timing of revenue from the Google agreement overshadowed an increase in revenue forecasts for fiscal 2027 and 2028 – Reuters. (Why you should care – Marvell said Google revenue would contribute meaningfully starting 2029)

Federal Reserve officials continue to send mixed signals on their outlooks for inflation, with some arguing higher interest rates are needed to tame prices while others signaled less urgency – Bloomberg. (Why you should care – while several officials have talked about the need to raise rates, the bulk of the voting policymakers have signaled a willingness to remain patient)

Economic Calendar:

Federal Reserve Bank of Kansas City’s Jackson Hole Symposium

Germany – Export, Import Price Index for July (2 a.m.)

France – CPI (Preliminary) for August (2:45 a.m.)

France – GDP for Q2 (2:45 a.m.)

Spain – CPI (Preliminary) for August (3 a.m.)

Eurozone – Consumer Inflation Expectations for August (5 a.m.)

Canada – GDP for Q2 (8:30 a.m.)

Fed’s Warsh (Governor) Speaks (10 a.m.)

U.S. – University of Michigan Consumer Sentiment for August (10 a.m.)

U.S. – Payrolls Benchmark (10 a.m.)

ECB’s Schnabel (Executive Board) Speaks (11:55 a.m.)

U.S. - Baker Hughes Rig Count (1 p.m.)

U.S. - CFTC’s Commitment of Traders Report (3:30 p.m.)

Fed Releases Balance Sheet Updates on Commercial Banks (4:15 p.m.)