“In the short term, the market is a voting machine, but in the long run, it is a weighing machine.” Benjamin Graham
To make buy and sell decisions, investors continually weigh the price of a stock (or the overall market) versus the prospects for earnings and dividend growth. The results rarely provide a definitive conclusion, but today’s reading is particularly murky because both valuation and growth are at extreme levels.
This chart shows the average percentile rank since 1900 of eight commonly used stock market valuation metrics. As you will note, the current level is at an all-time high, and the only previous readings that approached it were in 1929, the growth stock mania of the 1970’s, and the Dot-Com Bubble of the late 1990’s.
What about the other half of the weighing exercise? The next graph displays the progression of analysts’ forecasts of S&P 500 earnings for 2026 and 2027. First, analysts are optimistic by nature, so the typical annual pattern is for high estimates at the beginning of the year followed by reductions as reality sets in. The progression is currently the polar opposite with steady increases in expectations for both 2026 and 2027.
Goldman Sachs is now forecasting S&P 500 earnings for 2026 and 2027 of $340 and $385, respectively. Those figures represent growth rates of 24% and 13%. Both statistics are fantastic as compared to historical growth rates which have averaged just under 9% for the past ten years and 4% for the past twenty-five years. While valuations look extremely rich, they may be justifiable if these high earnings growth rates continue. So, the $75 trillion question is whether the AI boom will result in sustainable growth in corporate earnings. Or, alternatively, will earnings regress to a more normal level? At the moment, the market is clearly answering that exciting growth will continue. However, both the nature of capitalism and history suggest that unusually high profits draw in new competition eventually leading to lower profits and returns. We will see!