FactSet Currently, it is estimated that the earnings of S&P 500 components will grow by 30% in calendar year 2026. Analysts also predict that earnings will increase by another 27.4% in the third quarter and 25.2% in the fourth quarter. This strong performance continues from the exceptionally outstanding second-quarter financial reporting season; even excluding the exceptionally large investment returns from Alphabet and Amazon, earnings still grew by about 32%.

According to FactSet, since the beginning of the second half of the year, analysts have also been raising their forecasts rather than lowering them.

Normally, such profit figures would be directly regarded as positive.

The problem lies in the bond market.

5% Treasury yield changes valuation calculations

The yield on 10-year U.S. Treasury bonds has risen above 5%, reaching 5.34% at one point recently, the highest level since 2002. This upward trend continues a significant sell-off in bonds, which has become one of the biggest risks facing the U.S. stock market in the fourth quarter.

Official data from the U.S. Treasury Department shows just how significant the increase in long-term borrowing costs has been this year.

This is very important because investors can now obtain returns of over 5% on government debt, and the risks they bear are much lower than those associated with holding stocks. Higher yields also reduce the present value of future corporate profits, which is why expensive artificial intelligence and technology stocks are particularly sensitive to long-term interest rate changes.

Profits are playing a more significant role in driving growth.

So far, it seems that profits have been on the winning side.

Despite the soaring yields on U.S. Treasuries, the S&P 500 still rose by about 12% this year. When the 10-year yield climbed to 5.34%, the S&P 500 and the Nasdaq index remained strong, demonstrating their resilience.

Valuations have also become slightly less stretched. The forward price-earnings ratio of the S&P 500 has fallen back to near 20 times, whereas it was above 22 times earlier this year. This indicates that what drove this round of gains was more so profit growth than mere valuation expansion.

Emir Abyazov

Editor-in-Chief Coinpaper, responsible for data-driven editorial operations; SEO focuses on content discovery, as well as creating narratives that prioritize the audience interests in cryptocurrency, artificial intelligence, and fintech.