S&P 500 Earnings Surge While Valuations Fall—A Rare Opportunity

The S&P 500 closed Monday at 7,764.70, within striking distance of its mid-August record of 7,798.99. But the path to that peak tells an unusual story. Over the past three months, the index has barely moved—up just 1.8% since the end of June—while the earnings that companies are expected to generate over the next twelve months have climbed 8.8%. The gap between these two numbers is the entire story of why the market sits where it does.

Typically, when the S&P 500 reaches record highs, it does so because investors have bid up prices faster than profits have grown. They're paying more per dollar of earnings. This time, the opposite has occurred. At the end of June, a buyer of an S&P 500 fund paid 20.4 times expected earnings. Today, that same buyer pays closer to 19 times. The index has become cheaper, not more expensive, even as it approaches its all-time high. For someone considering a broad market fund like the Vanguard S&P 500 ETF, which holds the same stocks as the index and trades around $713 per share, this shift in the math matters.

The earnings growth itself is substantial. Analysts expect S&P 500 companies to deliver 28.9% earnings growth in the third quarter, which would mark the third consecutive quarter of year-over-year growth above 25%. What makes this more striking is that analysts have actually raised their estimates as the quarter has progressed. On June 30, they expected 26.7% growth for the quarter. That's the opposite of what normally happens. In a typical quarter, as reporting season approaches, analysts trim their forecasts downward. Over the past two months, they've lifted them instead—the first time in five years that estimates have risen between June 30 and August 31. Revenue growth tells the same story: S&P 500 sales are expected to climb 11.9% year over year in the third quarter, the third straight quarter above 10%. This means the earnings surge isn't simply the result of companies cutting costs or buying back shares. They're actually selling more.

Yet the growth is not evenly distributed. Energy leads with roughly 110% earnings growth, buoyed by oil prices that have averaged about 30% above their year-ago level. Technology follows at around 63%, but within that sector, chipmakers and their equipment suppliers are projected to grow earnings 126%—strip out the chip companies and the rest of the tech sector grows about 24%. Meta Platforms alone accounts for much of the communication services sector's 51% growth, with third-quarter earnings per share expected to jump to $6.74 from $1.05 a year before. Three areas—energy, semiconductors, and one social media company—are doing most of the work.

Analysts don't expect this pace to continue indefinitely. They forecast 26.5% earnings growth in the fourth quarter and 31.8% for all of 2026, followed by a slowdown to roughly 15% in 2027, with the second quarter of that year nearly flat. If spending on artificial intelligence cools faster than expected, chip profits could decelerate more sharply than currently projected. That possibility matters because the market's current valuation—below its five-year average when measured against forward earnings—assumes analysts are roughly right about the next twelve months. If they're wrong, or if the boom in chips and energy proves shorter-lived than expected, that discount could vanish.

Still, the past three months offer something worth noting for index fund buyers. The S&P 500 sits near its record not because prices have run ahead of earnings, but because earnings have grown into the price. That's the better way to reach a high. The index has already delivered two consecutive quarters of earnings growth above 25%, and its price hasn't come close to keeping up. Whether that gap closes because prices rise or earnings disappoint remains to be seen.