Mid-Year Market Update
Source: FactSet Research Systems; Archer Bay Capital LLC
US Bonds is represented by the Bloomberg Aggregate Index
The S&P 500 is up 10% year-to-date and the US bond market is about flat.
Since we always follow profits for an explanation for prices, we dug into the latest corporate earnings reports from the first quarter of 2026. Profit growth achieved has been extraordinary. Here is the summary by economic sector:
Source: LSEG S&P Earnings Scorecard; Archer Bay Capital LLC
The biggest positive surprises are in Communication Services, which includes Meta, Google and media companies; Consumer Discretionary, which includes Amazon; Materials, which are mostly chemical and mining companies; and Technology, which includes hardware, software, semiconductors and IT services.
Surprisingly, Energy was the biggest disappointment. Several factors caused the shortfall, including lower hedged oil prices that were in already in place before the war with Iran began, lower production and delayed contract deliveries due to the Middle East blockade.
Will corporate earnings growth continue?
Currently, Wall Street estimates are for earnings to increase sequentially throughout the year.
Second quarter earnings are expected to be 8.8% higher than the first quarter; the third quarter is expected to be 8.5% higher than the second quarter, and the fourth quarter 3.8% higher than the third.
This strong sequential growth makes year-over-year comparisons very big. It is easier to see when looking at the actual earnings per share and not just the growth rates:
Source: LSEG I/B/E/S; Archer Bay Capital LLC
What about valuation – is the growth priced in?
Historically, the S&P 500 has traded at about 16 times forward earnings. As profits have increased, so has the price/earnings ratio.
Source: FactSet Research Systems; Archer Bay Capital LLC
Currently, the S&P 500 index is trading at a multiple of 21 times earnings, which is outside of one standard deviation of the median. To keep at these levels, strong earnings will need to continue.
Conclusion
There is always uncertainty and Wall Street has been underestimating earnings strength over the past few years. If companies continue to deliver strong profit growth, then the rally should continue.
Our biggest concern is the risk of an unexpected profit decline. Historically, the largest corporate earnings’ declines tend to happen during recessions. We haven’t seen any warning signs yet for a recession in the near term, so we are staying the course.