While the market has held up quite well given all the turbulence this year, it’s hard not to go a day without hearing concerns. This is certainly understandable, given everything that has happened since the COVID-19 pandemic.
High interest rates and the longest inverted yield curve in history suggested a recession was almost a certainty, but there has been none. Meanwhile, there have also been major concerns about stagflation, another worrying scenario that would be bad for the market.
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However, while it seems like investors have been walking on eggshells for years, the S&P 500 (SNPINDEX: ^GSPC) is about to do something extraordinary for the fourth time in the last two decades. Let’s dive in.
One concern that bears have frequently pointed out is the elevated valuation of the S&P 500 since the pandemic. While it varies depending on the data source used, the S&P 500 currently trades at 28.5 times trailing earnings, well above its five-year average, which has risen by historical standards.
Bulls could argue that the market deserves a premium because it has posted strong earnings growth in recent years. Much of this has been led by large-cap growth and technology companies, which have seen 24% earnings growth in every quarter since the third quarter of 2023, according to a team of strategists at German Bank.
But with earnings season just beginning, Wall Street analysts on average expect the S&P 500 to deliver more than 16% year-over-year growth in the first quarter of 2026, the highest level in four years. Deutsche Bank chief strategist Binky Chadha believes that figure will actually exceed 19%.
“Meanwhile, investors’ positioning in equities is significantly underweight and in line with an imminent collapse in earnings growth,” Chadha and his team said in a recent research note. “Positioning is notably low for sectors that are currently in the market’s sights, such as finance and technology, especially software.”
Even the 16% consensus growth is an extremely high level “rarely expected at the start of any earnings season” but supports a healthy macroeconomic backdrop, US dollar weakness and tailwinds for cyclical growth.
Furthermore, according to Chadha and her team’s analysis, consensus earnings growth has only been this strong three other times in the past 20 years. In reality, most came after major sell-offs and financial crises, such as the Great Recession of 2008-2009, and after the worst of the COVID-19 pandemic. It also happened after significant corporate tax cuts were implemented in 2018.