The Market Isn't Irrational, It's Early

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

2. Wall Street expects CY2027 earnings of $417.

3. That gets me to a year-end target of 8,340.

Markets don't wait for the numbers to catch up. They're already pricing the next leg higher…

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 stocks and indexes are rising 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, or further, down the road. They know that today’s uncertainty eventually gives way to tomorrow’s clarity. And when predictability returns, they’re selling to the same people who doubted the rally 12 months earlier.

We’re halfway through the year, the market keeps grinding higher, and the skeptics keep asking why. They can’t seem to grasp that the artificial‑intelligence capital‑expenditure cycle is still accelerating. SemiAnalysis estimates more than $11 trillion in total AI spending by 2030. That kind of investment expands margins, boosts revenue, and lifts earnings power across the economy. The naysayers are missing what’s right in front of them.

Second‑quarter earnings season is around the corner, and analysts have been raising their forecasts. FactSet shows S&P 500 calendar‑year 2026 earnings estimates rising from $311 to $341 over the last six months. Expectations for 2027 have climbed from $358 to nearly $417. Based on those numbers, the S&P 500 could rally close to 8% by year‑end.

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

Coming into the second quarter releases, analysts were conservative in their earnings expectations. At the start of July, they predicted S&P 500 companies would report combined growth of 23%. That forecast came up short. With earnings now in the rearview mirror, growth more than doubled to 52%...

A big driver of the upside remains AI, and this quarter the payoff showed up in more places. A record 331 S&P 500 companies, or 67%, mentioned AI on their Q2 earnings calls. That included 91% of Financials, so adoption is still spreading well beyond Tech. The biggest boost to earnings, though, came from the rising value of AI investments. Amazon and Alphabet together booked roughly $150 billion in investment gains, including $53.4 billion at Amazon, mostly from its stake in Anthropic.

That spending keeps driving demand and margins for the big technology companies. Amazon Web Services grew 37%, its fastest pace in 18 quarters. Microsoft's Azure grew 43%, and Google Cloud jumped 82%. Nvidia's data center sales more than doubled to $89 billion. CEO Jensen Huang said, "compute is revenue. And demand is accelerating." Supply still can't keep up. Microsoft CFO Amy Hood said, "Demand continues to surpass supply," and Amazon raised its 2026 capital spending plan to $220 billion. Their earnings are still limited by how fast they can build capacity to meet customer demand.

The Technology and Financials sectors make up around 48% of S&P 500 earnings. Adding Communication Services, which includes Alphabet and Meta, brings that to about 60%. That’s important because the companies with the greatest ability to drive the index’s earnings higher are positioned for margin expansion. In other words, the broader index’s expectations need to go up.

As I said at the top, at the start of the year, analysts predicted calendar year 2026 earnings of $311 and calendar year 2027 earnings of $358. Now, those numbers have risen to $361 and $417, respectively…

The next step is to apply a suitable price‑to‑earnings multiple to estimate fair value. Let’s use 20x earnings, given that’s the five‑year average.

Remember, we want to invest today based on what earnings potential will look like a year from now. So, by the end of November, when third‑quarter results are complete, the market should be priced based on the forward 12‑month numbers. Multiplying our fair‑value multiple of 20x by the forward 12‑month earnings estimate of $381, we get a price target of 7,980 for the S&P 500, about 3% higher than current levels.

But look further down the road. By year‑end, the market should be priced off CY2027 earnings estimates. Using the same math, fair value lands us near 8,340 for the S&P 500. That’s almost 8% above today’s 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:

Qatari Prime Minister Sheikh Mohammed bin Abdulrahman Al Thani said his country’s mediation efforts have broken stalemates in the past few months, and he is hopeful that continued negotiation will be able to bring the situation in the Middle East back on track – Bloomberg. (Why you should care – he said Qatar will continue to work with other nations to bring together collaborative solutions)

Iranian-backed Houthis in Yemen have written to the EU to say they will not target European ships in the Red Sea, even as the rebels seek to tighten their grip over the key Bab al-Mandeb Strait – FT. (Why you should care – the commitment from the Houthis should help to ease concerns about the ability to transport goods through the Red Sea versus the longer route of going around Africa)

U.S. President Donald Trump has rejected Iran’s proposal for a seven-day ceasefire and has told aides he expects to resume bombing Iran after the November midterms, according to U.S. officials; Tehran’s proposal would have reopened the Strait of Hormuz and resumed nuclear talks in return for the U.S. lifting its blockade of Iranian ports, which is causing deep damage to the country’s economy – WSJ. (Why you should care – it’s unlikely the two sides are likely to strike an agreement before early November)

Iran said it’s awaiting a definitive U.S. response to a seven-day proposal for reopening the crucial Strait of Hormuz but won’t soften its conditions, after President Donald Trump voiced his rejection; Foreign Minister Abbas Araghchi said it has yet to receive any communication from mediators Qatar and Pakistan – Bloomberg. (Why you should care – Iran is signaling it is still open to the negotiation process to find a resolution)

The turbulence that has rocked private credit funds for the past year showed signs of easing in September, with the flood of redemption requests from retail investors slowing and performance improving; flagship funds for individual investors managed by Apollo Global, Ares and BlackRock reported a decline in redemption requests – FT. (Why you should care – a continuation of this trend moving forward would be a signal that investors are less worried about corporate defaults moving forward)

Economic Calendar:

ECB's Machado (Supervisory Board Member) Speaks (3:40 a.m.)

BoE's Ramsden (Deputy Governor) Speaks (6 a.m.)

Fed's Bowman (Board, Vice Chair for Supervision) Speaks (8:15 a.m.)

U.S. - Dallas Fed Manufacturing Index for September (10:30 a.m.)

Treasury Auctions $95 Billion in 13-Week Bills (11:30 a.m.)

Treasury Auctions $82 Billion in 26-Week Bills (11:30 a.m.)

Fed's Barkin (Richmond, Non-Voter) Speaks (1:30 p.m.)

U.K. - BRC Shop Price Index for September (7:01 p.m.)