Published September 25 2026
Artificial Intelligence has supercharged the stock market. Stocks are essentially at all-time highs. By several measures valuations are also at all-time highs. When it comes to earnings estimates, however, this time really is different. In the following graph the projected price-to-earnings ratio for the S&P500 for the next 12 months is basically right on the 10 year average due largely to the phenomenal earnings growth of the megacap AI companies including Nvidia, Google, Meta, and Microsoft.
Forward 12-month P/E ratio for the S&P500 is 19.1
This is below the 5-year average (19.8) but above the 10-year average (19.0)
Earnings growth among technology firms has been particularly strong and for the current quarter with 44 out of 50 firms increasing their earnings guidance.
As such, analysts have therefore raised their earnings estimates for the current quarter and the next. Eventually however, forward earnings estimates will have fully accounted for this phenomenal growth and firms will no longer be able to increase their guidance. Already we’ve seen a significant portion of last quarter’s tech earnings were due to one-time equity gains. With the November anticipated Anthropic IPO more such gains are likely ahead.
As we look into next year however, Factset warns of an earnings cliff, with 2Q27 earnings growth of only 1.5% and it may well be that investors soon react negatively after the explosive earnings growth in 2025 and 2026.
S&P500 Forward Earnings Growth (source: Factset)
Market Update
On Monday a sharp decline in crude oil prices (falling over 3%) combined with softening Treasury yields eased immediate inflation anxieties, unlocked broad equity buying. Technology shares had a massive rally boosted by comments from Nvidia’s CEO brushing off long-term AI safety fears, alongside Meta soaring 11% on the launch of their “Muse” personal agent which recorded 2.8 million downloads in its first 2 weeks. The NASDAQ 100 leapt 2.8%, the S&P 500 rose 1.5% and the Russell 2000 was again the laggard, only climbing 0.5%.
Tuesday’s action had tepid follow through, with the S&P500 closing flat, the NASDAQ continuing Monday’s rally with a gain of 0.8% and the Russell 2000 perked up 0.5%. Investor focus shifted from celebrating Meta to panicking over the competitive threats Muse poses to traditional finance. Because the agent can negotiate Internet bills, process returns, and automate comparison-shopping, fears of rapid service disruption caused a sharp 2% selloff in the S&P 500 Financial sector, with financial
Wednesday brought a dramatic rout in government bonds sent long-end yields soaring, with the 5-year Treasury yield surging to 5% for the first time since 2007. Spiking borrowing costs and a sudden reversal in crude oil prices renewed inflation anxieties, dragging small-caps down and snapping the Nasdaq’s winning streak. The Russell led the way down 1.8% while the S&P500 fell 0.75% and the NASDAQ 100 fell 0.85%.
On Thursday the 10Y Treasury yield touched 5.2%—its highest level since 2007—while crude prices spiked past $107 per barrel following a Houthi missile strike on Saudi Arabia. Stocks eventually rebounded off midday lows after headlines crossed that U.S. and Iranian negotiators were exploring a path to ease conflicts around the Strait of Hormuz. Stocks closed mostly flat.
Friday stocks rallied into the close on weakening oil prices and news from Iran that they were actively negotiating with the US. The S&P500 and the NASDAQ 100 each closed up half a percent and small cap stocks managed to squeak out a 0.1% gain despite interest rates closing up in on the day.
For the week, the NASDAQ 100 led the way higher up 3.25% while the S&P500 posted a 1.22% gain. The Russell 2000 languished again this week, mostly due to rising interest rates, falling 0.69%.
Warm wishes and until next week.