Another week and continued optimism over progress in the Middle East and strong earnings gains have kept the rally rolling. April isn’t quite over yet, but the S&P 500 is up 9.8% this month, which would be the second-best April ever (only 2020 was better).
Optimism over the Middle East is helping, but at the end of the day, stronger earnings are likely a bigger reason for the gains. 28% of the S&P 500 has now reported, and 84% of companies have beaten Q1 earnings estimates while 81% have beaten revenue estimates. We’re aware there is confusion over how stocks could be back to new highs so soon, but in the end, strong earnings drive longer-term stock gains, and continued earnings strength is a big reason behind the rebound.
March Weakness Is Normal Under President Trump
Mark Twain famously quipped, “History doesn’t repeat, but it does often rhyme.” Well, we could be looking at history rhyming once again with another March low. In fact, under President Trump, it has been perfectly normal for the S&P 500 to start the new year off well, tank into March, and then rally over the rest of the year. So far, that sounds like this year, with stocks up early in 2026, then falling 5.1% in March. Yes, 2020 and COVID are major contributors to the pattern (down 12.5% in March), but last year saw a very weak month of March as well (down 5.8%) due to worries over tariffs and AI. The bottom line, looking at the five years under President Trump, is that market lows right around now are perfectly normal. The other bit of good news for investors is that the rest of the year can be pretty good, something we expect again this year.
Semiconductors Are on Fire
The US is very tech-heavy, and there is no more important group to tech overall than semiconductors. Incredibly, the iShares Semiconductor ETF (SOXX) is up a record-breaking 18 days in a row. As we noted last week, some of the huge record-breaking moves we’ve seen the past few weeks have historically been a bullish signal longer term. Well, to see this influential group taking back the baton and leading stocks to new highs is yet another positive for the bulls.
‘Sell in May’ Is Nearly Here
Prepare to hear a lot about this one. The worst six months of the year for the S&P 500 historically are May through October, and May is around the corner. This stretch gave us the well-known saying “Sell in May and go away,” so we like to call May to October the “Sell in May” period. Here’s the thing—it hasn’t worked at all lately. In fact, last year at this time, many were worried about tariffs and the fallout that would come with them, yet we saw the largest May-to-October “Sell in May” gain ever (up nearly 23%).
We’ll discuss this in more detail next week, but for this week, we wanted to at least touch on it, should you start to hear about it. So, how have those six months done lately? Higher nine of the past 10 years and up nearly 7% on average. We continue to think we could see a strong move higher into year end, and we would suggest not selling in May this time around.
There’s No Puzzle as to Why Stocks Are at All-Time Highs
The S&P 500 and Nasdaq hit new all-time highs last week, and this isn’t sitting well with many people. We’re seeing a steady stream of commentary along the lines of “this doesn’t make sense” and “risk assets are detached from reality.” Or that markets are looking past the Middle East crisis. But we don’t think markets are ignoring anything. They’re focused on what matters: profits.
The S&P 500 is now up 5.1% year-to-date (as of April 24), including dividends. That’s entirely on the back of rising profit growth estimates. Let’s unpack this. The S&P 500’s next 12-month earnings per share (NTM EPS) is currently $338/share, up almost 10% since the end of last year and 6.5% over the past eight weeks (since the crisis began). In other words, almost two-thirds of the gain in NTM EPS has come while the crisis was raging on.
Keep in mind that the NTM EPS is now mostly about 2026 EPS expectations. Almost two-thirds of NTM EPS is expected EPS for 2026 ($323) and one-third expected EPS for 2027 ($373). At the end of the year, the NTM estimate will match the 2027 estimate exactly. As the year moves forward, NTM EPS should continue rising, since it will be weighted more toward 2027 and less toward 2026 (that is, as long as 2027 EPS doesn’t fall significantly). In other words, we’re looking at yet another year of strong EPS growth. Right now, the expectation is that 2027 EPS will be 16% higher than 2026 EPS.
With earnings growth in mind, let’s look at what’s contributed to the S&P 500’s return this year. We can separate the return into three basic pieces.
- Earnings growth
- Multiple change (change in the price-to-earnings ratio, a proxy for what investors are willing to pay for earnings)
- Dividends
For the S&P 500, the year-to-date return of 5.1% came from:
- Earnings growth contribution: +9.4 percentage points
- Multiple growth contribution: -4.8 percentage points
- Dividends: +0.4 percentage points
In short, the year-to-date return is almost entirely on the back of rising profit expectations, which has more than offset multiple contractions. The forward P/E is now at 21.3x, down from 22.2x at the end of 2025. At the pre-crisis all-time high (January 27), the forward P/E was 22.5x, and back in October of last year, the forward P/E had gotten as high as 23.5x. At the lowest point of the recent pullback (March 30), the forward P/E had fallen as low as 19.3x.
All this to say, the index is at new record highs, but multiples are lower now than they were a few months ago. Usually, as earnings expectations rise, you tend to see more optimism and the P/E ratio rises. But that’s not happened recently, and the big reason is that real rates have jumped as investors priced in a less dovish Fed amid higher inflation.
A Closer Look at Profit Growth
Profit growth itself can be separated into two pieces: sales growth and margin expansion. Sales growth is closely tied to nominal GDP growth, and as long as we don’t have a recession, sales growth should run fairly strong. This was the case even in 2022, when sales growth was a healthy 8.5% as nominal GDP growth clocked in around 8% that year. But EPS growth was weak in 2022 (+3.8%) because of a pullback in margins amid surging interest rates.
However, margins have expanded a lot over the last three years. Forward margins were around 12% at the end of 2019 and had expanded to 12.7% by the end of 2022. The growth has continued, and margins sat at 14.5% by the end of 2025, a new all-time high. And they’ve expanded even further to 15.2% this year.
Here’s a look at how this has actually helped S&P 500 returns year-to-date. We do the same breakdown as above, but also break down earnings growth into sales and margins. As we noted above, the S&P 500 is up 5.1% year to date. Here are the contributions:
- Earnings growth: +9.4 percentage points
- Sales growth: +4.4 percentage points
- Margin expansion: +5.0 percentage points
- Multiple growth: -4.8 percentage points
- Dividends: +0.4 percentage points
In short, expected profit margin expansion is the biggest driver of profit growth so far in 2026 (this is all forward looking), even more so than sales growth expectations.
This is all captured in the above chart, which explains why the index is at all-time highs despite a major crisis in the Middle East.
- The primary driver of the year-to-date return is margin expansion, but the other side of this is inflation.
- Sales growth is strong on the back of strong nominal GDP growth (5% to 6%) but that’s because of inflation rather than real GDP growth (which is likely to run ~2%, below trend for a second straight year).
- Multiple contraction has been a drag on returns, as markets price in fewer rate cuts and a relatively less dovish Fed amid higher inflation.
A Profit Margin Expansion Story Is Also an Inflation Story
Too many commentators are making the mistake of translating an inflation surge into weaker real consumption, and hence weaker economic growth and profit growth. But as we can see, inflation also means margins are rising, and that’s driving profit expectations higher. This becomes clearer if we look at individual sectors.
The S&P 500’s 2026 EPS expectation has risen over 4.5% since the start of the year, from $309 to $323. The 2027 EPS expectation has jumped even more, rising over 5% from $355 to $373.
A breakdown of the 11 S&P 500 sectors shows exactly which sectors are boosting the aggregate index’s profit (EPS) expectations. Most of the growth is focused in three sectors: technology, energy, and materials. From the start of the year through April 24:
- The tech sector has seen 2026 EPS expectations grow over 11% and 2027 EPS grow over 15%.
- Energy has seen 2026 EPS expectations grow by almost 40% and 2027 EPS by 14%.
- Materials has seen 2026 EPS expectations grow over 11% and 2027 EPS by almost 10%.
The remaining sectors haven’t seen EPS estimates pull back in a significant way, but we have seen some downward adjustments for sectors that are hit harder by higher input prices, like consumer discretionary, industrials, healthcare, and consumer staples.
Highlighting inflation is not to say it’s all “predatory pricing.” A lot of these firms are in the right place at the right time, whether it’s chip manufacturers (in the US or even in South Korea and Taiwan) or energy companies. As John Maynard Keynes said:
“Profiteers are a consequence, not a cause, of rising prices.”
In any case, the ultimate beneficiary has been stock prices (and investors). That is likely to hod up as long as the Fed continues to view inflation once again as “transitory.” For now, we continue to have a dovish tailwind in the form of a Fed that is likely to look the other way on inflation. For a moment there, markets had taken out the possibility of any rate cuts this year amid renewed inflation concerns, but over the last two weeks, markets once again priced in a higher probability of at least one cut (about 25% to 30%).
As we’ve highlighted in recent weeks and months, inflation remains elevated even outside of energy, and the Fed had a problem even prior to the Middle East crisis. In fact, the Fed holding rates steady would imply policy is getting looser as inflation picks up, setting aside any rate cuts in this environment. That would be a tailwind for stocks, at least until the Fed gets serious about inflation and lands in a situation where they’re forced to hike rates to such a degree that it not only curbs inflation, but also pushes the economy into recession in the process. Surging policy rates would raise real rates and hit multiples hard, pulling the index lower.
For now, that’s not in the cards, hence the focus on potential upsides. At the same time, an inflationary regime means we must balance contrasting ideas in our head, like the prospect of rising corporate profits even as inflation remains elevated. The inflation picture confounds normal analysis of what the economy and companies are likely to do, and here it’s important to even differentiate between real and nominal GDP growth. It’s the latter that matters for revenues and profits.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly traded companies from most sectors in the global economy, the major exception being financial services.
The views stated in this letter are not necessarily the opinion of Cetera Wealth Services LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
