The US stock market began 2026 on a relatively positive note. The first six months saw huge volatility, but the market still managed to end at an elevated level. As of June 29, both the Dow-30 and S&P 500 indices have increased by over 8.5%, while the Nasdaq-100 has risen by 18%.
In March, the S&P 500 index came close to a correction due to rising oil prices and bond yields amid the war in Iran. Oil prices had spiked to nearly $121 a barrel during this period. However, a strong rally followed, leading to record highs in April and May, before a pause in June. Oil prices have since dropped to approximately $70, reverting to pre-war levels, though uncertainty around the war and the blockage of the Strait of Hormuz remains.
Despite these risks, what is really driving the market right now is corporate earnings.
US market analysts are bullish for this reason. According to FactSet, in the first quarter, S&P 500 companies reported earnings growth of 28.6%, the highest growth rate since Q4 2021. Also, 85% of S&P 500 companies reported actual EPS above estimated EPS, the highest percentage since Q2 2021.
John Butters, Vice President and Senior Earnings Analyst at FactSet, says, “Industry analysts in aggregate predict the S&P 500 will see a price increase of 21.2% over the next twelve months.” The S&P 500 is currently at 7,440 after rising 20% over the last 12 months.
Despite possible risks and difficulties, Wall Street consensus indicates that robust corporate earnings will keep the bull market going into the second half of 2026.
“While the S&P 500’s forward P/E is around 21, one approach to look at where equities are headed is to look at earnings yield. If earnings continue to grow at a certain rate, and valuations remain relatively stable without any meaningful compression, then stocks should appreciate by roughly their earnings growth rate plus their earnings yield.
I think S&P 500 earnings can grow in the range of 13% to 15% over the next year. Combined with an earnings yield of around 5%, that would imply a return profile that supports an S&P 500 target of 8,100 to 8,150,” says David Miller, Sr. Portfolio Manager and CIO, Catalyst Funds.
Driving Force in H1
The driving force behind the H1 growth is the boom in the AI data center sector. Alphabet, Microsoft, Amazon, Meta, and Oracle are projected to lead to over $700 billion in capital expenditures by 2026.
This investment in semiconductors, servers, and data center equipment has significantly boosted the earnings of chip designers like Nvidia and Broadcom, as well as memory suppliers like Micron and Sandisk, making them some of the S&P 500’s top-performing stocks this year.
AI investment is positively impacting businesses nationwide, extending beyond Silicon Valley. Following a year of contraction, manufacturing activity began to expand in January and has continued to do so since. BCA Research projects that the median S&P 500 company will see earnings growth of around 14% in the coming year.
Risks Ahead
Inflation seems to have made a comeback, but the recent slump in oil prices may not keep prices elevated for long. Markets currently expect a rate hike in September, which will depend a lot on how the US CPI data shows up in July and August. The Federal Reserve, led by Kevin Warsh, is adopting a less predictable communication strategy, potentially increasing market responsiveness to economic data.
Higher rates are also an unviable option for the US fiscal policy. The US is already facing challenges with rising interest payments on its debt, and it also has significant political pressure on its monetary policy.
Investors also need to be aware of the foreseeable risks. Investors have increasingly poured money into speculative growth stocks, raising concerns of a market reversal or crash, as noted by JPMorgan. Recent sharp sell-offs in June highlighted this volatility, and ongoing debates about the AI bubble may impact the current rally.
Disclaimer: This article is for informational purposes only and should not be considered investment advice. Readers should consult a financial advisor before making any investment decisions. Market forecasts and analyst projections mentioned are subject to change and are not guarantees of future performance.
