The S&P 500 index is still expected to achieve positive real returns in 2026, but the driving force behind this upward trend is shifting from valuation expansion to corporate earnings. Against a backdrop of relatively tight interest rate environments, the market's reliance on profit growth is on the rise.

Second-quarter profit growth accelerated

S&P 500 components delivered strong performance in the second quarter. FactSet data shows that corporate profit growth rates reached their highest level since the second quarter of 2021. Reuters reported a year-on-year increase of about 33.5%.

Analysts currently expect that profits in the third quarter will still grow by about 27% to 28% year-on-year, with the annual profit increase being around 30%. This means that this round of growth is not entirely dependent on rising valuations; there is still fundamental support behind it.

AI segment continues to contribute profits

AI remains an important driving force for corporate profitability. Technology and communication service companies have contributed to strong profit growth, and the continuous investment in AI infrastructure is also supporting market expectations for future performance.

From a return perspective, nominal increases do not equate to a corresponding increase in purchasing power. If the S&P 500 rises by 13%, and inflation during the same period is 3.5%, then the actual return, calculated in a simplified manner, is approximately 9.5%.

U.S. Treasury yields suppress valuations

The current greater obstacle comes from the high level of borrowing costs. The yield on 30-year U.S. Treasury bonds has recently risen above 5.2%, approaching its highest level since 2007, while the yield on 10-year Treasury bonds remains around 4.7%.

Higher U.S. Treasury yields, on one hand, increase the attractiveness of low-risk assets, and on the other hand, they also raise the discount rate for future corporate profits, thereby suppressing stock valuations, especially for the high-valued technology and semiconductor sectors.

On August 13, the S&P 500 index reached a record high of 7,798.99 points, but subsequent selling in the bond market caused the stock market to decline, with growth stocks facing even greater pressure. At the same time, markets also raised expectations for interest rate hikes in September, and strengthening oil prices added further pressure to inflation.