Will the S&P 500 stay at the top?

The S&P 500 has retreated from its record highs amid concerns about a cooling US economy. Until now, its resilience, coupled with impressive corporate results, had enabled the stock market to scale new heights. However, falling employment and retail sales, deteriorating consumer sentiment and slowing inflation point to weaker demand.

In the second quarter, profits at tech giants rose by 31%, exceeding the already optimistic forecast of 23%. The former figure is a record, while the latter is among the best outside post-recession recoveries. These gains have been achieved through increased productivity, as more companies adopt AI. Around 90% of listed companies have reported their financial results, and the S&P 500 is currently on track for its best half-year earnings-per-share performance since 2021.

Corporate earnings growth is outpacing that of the broad stock market index, leading to a fall in the forward P/E ratio from 26 at the start of the year to 22. The decline in the financial multiple suggests that there is no bubble to speak of. Fundamental valuations make the S&P 500 an attractive buy. Unsurprisingly, Wall Street’s consensus forecast for the broad stock index at the end of 2026 has been raised to 7,894. Experts believe it will rise by at least a further 1%. At the same time, analysts have raised their earnings-per-share forecasts from 15% in January to 27%.

Such figures have not been seen outside of recovery periods following downturns. The instances in which the S&P 500 has posted double-digit growth at the end of each of four consecutive years can be counted on the fingers of one hand. Signs of a slowdown in the US economy are a warning; however, if GDP growth falls only slightly, a so-called Goldilocks scenario will emerge – a combination of a slow but still strong economy and a Federal Reserve reluctant to raise interest rates.

The VIX's fall to its lowest level since late December signals that greed is dominating the equity market. At the same time, derivatives are pricing in modest daily gains for the S&P 500 through to the end of August, not exceeding 0.8%. The key events are NVIDIA’s corporate earnings report and the Jackson Hole Economic Symposium. 

Summary: The S&P 500 remains near its highs as strong earnings offset slowdown risks, with AI-led productivity gains, lower valuations, and key events shaping the outlook.