Analysis-Higher bar for corporate profit growth poses challenge for US stock market rally

NEW YORK - Rising optimism over corporate earnings has driven the U.S. stock market to new heights in 2026. The question investors want answered in the coming weeks: can companies deliver on that profit promise?

Estimates for 2026 earnings have soared following a blowout first quarter for U.S. results, which was underpinned by massive spending on the AI infrastructure buildout and a solid economic backdrop.

A more solid earnings picture provides strong fundamental support for stocks, investors say, but the higher estimates could be more challenging for companies to meet and lead to market fallout for any disappointments -- a dynamic that may have been in play this week with strong earnings by Samsung Electronics followed by a selloff in the volatile semiconductor industry.

For the second quarter that just ended, S&P 500 companies are expected to report aggregate earnings growth of 23.4% from a year ago, according to LSEG IBES, which compiles estimates from analysts. That's substantially higher than the 15.2% growth that had been expected for the period when the year began. Projections for the rest of 2026 have also boomed.

"Increased earnings and increased expectations are great for investors because it does drive the market higher," said Chris Fasciano, chief market strategist at Commonwealth Financial Network. However, he said, "that certainly raises the bar."

EARNINGS DRIVE MARKET AS VALUATION MODERATES

Second-quarter earnings season kicks off next week with reports from major banks including JPMorgan Chase and Goldman Sachs, as well as other high-profile companies such as Netflix and Johnson & Johnson.

Massive capital spending by major companies to expand AI infrastructure has propelled earnings this year, especially for semiconductor companies but also for an array of tech, industrial and other firms benefiting from the buildout. Consumer spending that has remained solid, despite energy price spikes following the Iran war, also helped shore up economic growth.

This year, estimates for the index's expected earnings improvement are outpacing the market's gains: The S&P 500 has climbed 9%, while estimates for year-forward earnings are up 21% during 2026, according to LSEG Datastream.

"It's very, very rare that you have this strong of a market, but earnings are even stronger," said Mark Hackett, chief market strategist for Nationwide.

Stronger earnings prospects have helped moderate the overall market's valuation in 2026, bucking the general trend of stocks broadly becoming more expensive during the bull run that began nearly four years ago. The forward price-to-earnings ratio for the S&P 500 last stood at 20.1, down from a P/E multiple of 22.2 at the end of 2025, according to LSEG Datastream.

A market propelled by positive earnings momentum is encouraging, investors said. But that could also leave little room for error when companies start reporting results and giving forecasts over the next few weeks.

"We're going to be heading into Q2 with some higher expectations," said Joe Mazzola, head trading and derivatives strategist at Charles Schwab. "It's probably going to be a little bit more volatile in terms of the Q2 earnings just because of the fact that revisions have gone upwards."

HAVE ESTIMATES GONE TOO FAR?

While investors had braced for strong first-quarter results earlier this year, the performance ended up far surpassing even those upbeat hopes, resulting in the highest quarterly earnings growth in more than four years. S&P 500 earnings rose by a whopping 29.4% in the first quarter; that compared to a gain of 14.4% that was expected at the start of April before the reports began.

The question facing Wall Street now is whether analysts have since become overly rosy in their profit views.

"The risk is that Q1's exceptionally strong results led (analysts) to raise their estimates for the remaining three quarters by too much," Yardeni Research said in a note this week.

Among S&P 500 sectors, the heavyweight technology sector's profit growth is expected to be 65.5% in the quarter, according to LSEG IBES data. Other standouts include energy, with earnings expected up about 115% in the quarter as oil spiked, and materials, up an expected 32.5%.

"I would not expect big moves in tech stocks and other stocks unless they beat by a wide mile," said Bruce Zaro, managing director at Granite Wealth Management in Plymouth, Massachusetts. "Those earnings bars ... have been set at a higher level now."

The full-year estimate has climbed to an earnings increase of 26.4% in 2026, which would be the strongest annual profit performance since 2021. Another 17.9% rise is expected in 2027.

Hackett said he wanted more clarity on whether some of the drivers of 2026's profit strength -- such as AI-related benefits and fiscal stimulus -- would be repeated going forward.

"That to me is the biggest concern, is the one-time nature of some of these events that have happened this year that just aren't sustainable," Hackett said.

Uncertainty about whether earnings will reach the lofty estimates may be moderating the market's valuation somewhat, investors said. Projecting results that stem from an emerging technology like AI can be trickier, said Jack Ablin, founding partner and chief investment strategist at Cresset Capital.

"That's part of the reason that multiples are coming down because the visibility isn't there," Ablin said. "That also puts so much more important emphasis on earnings season. We'll get a better sense of where things are headed."

(Reporting by Lewis Krauskopf and Caroline Valetkevitch, editing by Colin Barr and Nick Zieminski)

Copyright Reuters or USA Today Network via Reuters Connect.

This story was originally published July 9, 2026 at 4:01 AM.