Are Earnings Driving the Market Higher?
With most S&P 500 companies having reported their 1Q26 results, can earnings continue to surprise to the upside?
The S&P 500’s earnings story has shifted meaningfully since ChatGPT launched in late 2022. After a difficult 2023, earnings have steadily recovered as enthusiasm around generative artificial intelligence (AI) turned into real AI infrastructure spending on data centers, chips, networking, and power. With most S&P 500 companies having reported their 1Q26 results, can earnings continue to surprise to the upside?1
- The market’s advance since 2022 has often been debated through the lens of valuations, interest rates, and investor sentiment. Earnings growth, however, has been the real driver in our view. As shown in the chart above, S&P 500 earnings growth has increasingly outpaced analyst estimates, indicating that corporate America has delivered a stronger profit cycle than many expected. Additionally, despite the S&P 500 returning ~9% year to date through May 12, 2026, its forward price-to-earnings ratio (P/E) has fallen from 22x at the start of the year to roughly 21x – a sign that earnings rather than investor sentiment have driven the market higher.2 In our view, this is evidence of a real business spending boom, with capital from large technology companies translating into revenue and profit for the businesses supplying the AI buildout.
- We believe that dynamic was on full display in the first quarter of 2026, as S&P 500 earnings came in at roughly twice the pace analysts had forecast at the start of the quarter.3 Importantly, companies most directly tied to the AI infrastructure buildout saw meaningful earnings growth. Within Information Technology, semiconductor companies posted standout results as data center buildouts drove rising demand for chips, memory, and networking. Within Industrials, electrical equipment providers, which supply the transformers, switchgear, and power management systems that data centers require (see also The AI Power Problem), also saw earnings climb.
- A narrow group of stocks leading the market higher is a fair reason for caution, but we believe the foundation matters. In our view, stock prices ultimately follow earnings, and earnings have been doing real work rather than leaving P/E multiples to do all the heavy lifting. The AI investment cycle is also showing up in places that take years to build out, including chip fabrication capacity, data center construction pipelines, and power grid upgrades. With the buildout still in early innings, we believe the conditions for continued earnings growth remain in place.
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1FactSet and S&P Global Inc. Approximately 90% of companies within the S&P 500 Index reported their calendar year 1Q26 earnings as of 5/12/26.
2FactSet and S&P Global Inc. The S&P 500’s total return from 12/31/25 through 5/12/26 was 8.6%. Past performance is not indicative of future performance.
3FactSet and S&P Global Inc. as of 5/12/26.
The views expressed are the views of Fred Alger Management, LLC (“FAM”) and its affiliates as of May 2026. These views are subject to change at any time and may not represent the views of all portfolio management teams. These views should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by FAM. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.
Risk Disclosures: Investing in the stock market involves risks, including the potential loss of principal. Growth stocks may be more volatile than other stocks as their prices tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political, and economic developments. Past performance is not indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments. Companies involved in, or exposed to, AI-related businesses may have limited product lines, markets, financial resources or personnel as they face intense competition and potentially rapid product obsolescence, and many depend significantly on retaining and growing their consumer base. These companies may be substantially exposed to the market and business risks of other industries or sectors, and may be adversely affected by negative developments impacting those companies, industries or sectors, as well as by loss or impairment of intellectual property rights or misappropriation of their technology. Companies that utilize AI could face reputational harm, competitive harm, and legal liability, and/or an adverse effect on business operations as content, analyses, or recommendations that AI applications produce may be deficient, inaccurate, biased, misleading or incomplete, may lead to errors, and may be used in negligent or criminal ways. AI companies, especially smaller companies, tend to be more volatile than companies that do not rely heavily on technology.
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