Specialist Michael Pistillo works at his post on the floor of the New York Stock Exchange on April 30. The stock market has been impervious to war, tariffs and oil prices due to unprecedented earnings, writes Tim Shufelt.Richard Drew/The Associated Press
The most urgent issue in investing today is whether the good times are too good to be true.
Why is the stock market thriving while the world is on fire? Why did stocks bounce back so quickly from the war in Iran even as an oil shock ripples through the global economy? If there’s an artificial-intelligence bubble, why hasn’t it popped? And why do investors seem oblivious to the risks of inflation, rising interest rates and recession?
There is a one-word answer to all these questions. The word is “earnings.”
The most dangerous kind of stock market melt-up is fuelled by valuations spiralling out of control. That’s not what’s happening now.
Instead, a historic earnings boom is under way. The effect can be seen globally, and across lots of different industries. But the real action is in the United States.
Corporate America is raking in astonishing amounts of money, despite all the bad news making for grim headlines every day.
Global debt hits record of near US$353-trillion, with signs of investors moving away from the U.S.
Hundreds of U.S. blue-chip companies have reported their first-quarter financials in recent days, and the results are close to unprecedented – almost 30-per-cent growth in profits, year-over-year. A month ago, Wall Street was expecting that number to be 14 per cent, according to LSEG data.
Now analysts can’t revise their forecasts for future earnings for S&P 500 companies fast enough. What was until recently expected to be a 14-per-cent year is now tracking toward earnings growth of 23 per cent for all of 2026.
Want to know why the stock market has been impervious to war, tariffs and oil prices? There’s your answer.
Financial commentary this year has been consumed by the gap between markets and reality. “Why the stock market makes no sense right now” was the headline on a recent piece in The New York Times. It argued that markets are failing to properly price risk.
It all makes sense when you grasp how closely the stock market tends to track earnings growth. Yes, markets are ignoring the situation in the Middle East and its economic fallout, because financial conditions at the margin have improved a lot in a very short time frame.
“If you’re having a hard time grasping this idea, remember that the stock market’s job is to make you say, ‘This makes no sense,’” analytics firm Duality Research wrote in a recent newsletter.
Stunning U.S. profit strength ignites stocks’ charge to record peaks
In other words, forget the storylines suggesting real-world chaos ought to be tanking the stock market. Look to earnings instead.
There’s a crucial counterpoint to consider. What if there’s a bubble in corporate earnings? It’s a fair question. That’s probably where the market’s risk is concentrated right now, rather than in valuations.
Historically, asset bubbles have been a function of insane trading multiples. When the investing masses are whipped into a frenzy, paying ever-higher prices for exciting but unprofitable companies, the whole thing eventually collapses in on itself.
Rarer is when the trouble lies with earnings themselves.
“The flipside is that there may be a bubble in the earnings of the semiconductors and semiconductor equipment industry group, even if there isn’t one in the price that investors are willing to pay for them,” John Higgins, chief economic adviser at Capital Economics, wrote in a recent report.
Oceans of money are swirling around the AI trade. The “hyperscalers” are expected to spend US$800-billion in capital expenditures this year, rising to US$1-trillion next year, according to Bank of America.
While these same companies are astronomically profitable, if AI demand falters, their share prices will be at risk. But there are simply no hints of that happening any time soon.
Outside of tech, earnings are also rising fast.
“It’s not like the numbers are getting stoked by one or two sectors,” said Robert Kavcic, senior economist at Bank of Montreal.
“We have sturdy domestic demand, solid productivity growth, and the ability to pass on at least some of the pressure from tariffs and higher oil prices.”
As long as earnings remain as powerful a force as they’ve been this year, it will probably pay for investors to lean in.