Cheap Stocks and Strong Earnings Keep the Market Melting Higher
Market Analysis by covering: S&P 500, Dow Jones Industrial Average. Read 's Market Analysis
The market is melting up, despite no believable resolution with Iran. Earnings are steering the boat, as they should.
Stocks soared yesterday on renewed hopes of a negotiated deal with Iran. But it was much more than similar turns in the road we’ve been down before. It appeared to be a capitulation that U.S. earnings are so strong that no matter how long it takes for Iran to get solved, stocks are very cheap right now.
Consider that after reaching 27% earnings growth in 1Q26, 2Q26 is expected to finish +38% y-o-y, bringing the full year +26%, the strongest year since Covid, the third year of double-digit growth since the 2000’s. Profit margins are at a record high. It is highly concentrated growth, with just 10 companies responsible for 77% of the earnings growth of 2Q26, but excluding those, EPS growth would still be +19%. Semiconductors have been a huge contributor, accounting for 24% of EPS growth in 2Q25, and coming in at 61% of 2Q26 growth. Hyperscalers have dropped from 31% of growth to 8% in the same year as their spending soared on data centers.
The AI theme is very much alive despite the recent volatility and continuing uncertainty of what the ultimate ROI will be, as well as the timing. But unlike the DotCom bubble where valuations were driven by the number of clicks that new websites were getting, the AI theme involves unprecedented spending on data centers, driving not only semiconductor spend but also construction and power supplies, bringing growth across major industries.
The data also shows a consumer AI adoption rate that is faster than any other modern technology; faster than smartphones, social media, the Internet, even computers. AI may experience volatility along the way, as we’ve seen in short-term pullbacks as spending commitments continue to rise, but the momentum is so strong and the commitments so long that earnings growth and margin improvements in at least the next couple of years appear secure.
With the S&P and Dow at new all-time highs, the FOMO is very strong, and cash still on the sidelines remains at record levels. At the same time, the forward P/E premium of the S&P relative to global equities has fallen to 22%, the lowest since 2020. It was at 50% in 2Q24. The 10-year average is 31%. We’ve actually seen stocks get cheaper as they go up.
The trend is very positive, with the catalyst for further gains from eventual lower energy prices followed by lower interest rates only a question of when, not if.