Still Priced for Growth, Not Fear

Editor's Note: At the end of August, I published an analysis of the S&P 500 Index's forward price-to-earnings-growth (PEG) ratio. At the time, the ratio was sitting at 0.8. History tells us the S&P 500 tends to see outsized gains over the following 12 and 24 months when the PEG ratio has been at similar levels.

Since then, the S&P 500 has rallied about 1.1% to a new high, yet the ratio has dropped to around 0.7 because analysts keep raising earnings estimates. In other words, stocks have gotten cheaper relative to expected growth even as prices climbed. The latest reading should support a continued stock market rally. The analysis from August is below...

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 in all five prior instances.

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. That’s 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 prices to match them.

What "Cheap" Actually Looks Like

Here's where the bubble narrative falls apart. If prices 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. That’s 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 a depressed PEG ratio, the outcome hasn't been close.

This is the difference between theory and track record. Every instance was positive at six, 12, and 24 months. The average gain builds from 8.7% at six months to 22.5% at a year and 43.9% at two years. 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:

Elon Musk’s SpaceX is in talks with banks and investors to raise $40 billion of debt to buy chips from Nvidia; the company is seeking to raise about $10 billion in bank loans and $30 billion in investment-grade debt to pay for the chips – Bloomberg. (Why you should care – the raise points to the continued strength in demand for compute power and data-center infrastructure)

France’s finance minister said the government is prepared to exercise special constitutional powers and circumvent Parliament to pass billions in spending cuts if negotiations stall over next year’s budget; Roland Lescure said he was willing to negotiate on all aspects of the budget, but he has two red lines—sticking to a maximum budget deficit of 5% of gross domestic product and avoiding any changes that hurt growth – WSJ. (Why you should care – the incumbent government is increasingly concerned about losing next year’s election due to rising costs and yields)

Saudi Energy Minister Prince Abdulaziz bin Salman said that ​oil pumped through the East-West Pipeline has reached 5.8 million barrels; Saudi Arabia restarted operations at the East-West Pipeline, after drone attacks by Iraqi militias, forced the kingdom to shut the pipeline on September 11 and halted crude loadings at the kingdom's Red Sea export hub of Yanbu – Reuters. (Why you should care – the 5.8 million barrels number is an increase from the 3.5 million when the pipeline was restarted)

Anthropic PBC’s Mythos artificial-intelligence model has dramatically increased global cybersecurity risks, according to JPMorgan Chase Chief Executive Officer Jamie Dimon; he said AI created vulnerabilities that we didn’t know about, and we always worried about cyber before these things” – Bloomberg. (Why you should care – rapid advancements made by AI as well as quantum computing will continue to drive demand for cybersecurity protection)

The U.S. Energy Information Administration raised its oil price forecast for this year and next year, as global stockpiles fall rapidly ​and diesel markets remain tight due to the ongoing Iran war; global benchmark ‌Brent crude is now expected to average about $98 a barrel in 2026, up 8% from the EIA's previous forecast – Reuters. (Why you should care – these types of forecasts tend to be reactive, and happen as concerns are peaking, rather than being proactive)

Economic Calendar:

Markets in China are Closed

Japan - Leading Index for August (1 a.m.)

U.K. - Lloyds House Price Index for September (2 a.m.)

Germany - Industrial Production for August (2 a.m.)

China - FX Reserves for September (4 a.m.)

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

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

U.S. - NY Fed 1-Year Consumer Inflation Expectations for September (11 a.m.)

Treasury Auctions $39 Billion in 10-Year Notes (1 p.m.)

Fed - FOMC Meeting Minutes (2 p.m.)

U.S. - Consumer Credit for August (3 p.m.)