INSIGHTS

On April 13, 2026

AAM Viewpoints — From Expansion to Execution: The S&P 500’s Fundamental Transition

The market is undergoing a structural transition. After two years of valuation-led gains, earnings have re-emerged as the primary anchor for performance. We view the current unwinding of forward multiples not as a signal of fundamental weakness, but as a constructive normalization reset that cleanses the prior expansion and sets a sturdier stage for a high-quality advance through 2026.

Where the Forward P/E (price-to-earnings ratio) Stands Today

The S&P 500 has begun to de-rate from its late-2025 peaks. After starting the year at a rich 22.0x forward earnings, the multiple has compressed to approximately 19.8x. Crucially, this compression is not price-driven; rather, the denominator (earnings) is finally outstripping price appreciation. This shift has restored a valuation cushion, bringing the index back in line with its 5-year average of 19.9x while effectively removing the "froth" that dominated January’s narrative.

Source: FactSet | Past performance is not indicative of future results.

The Boost: Upward Revisions for 2026

The core of our bullish thesis lies in the pairing of multiple contractions with aggressive earnings momentum. Despite higher-for-longer headlines, the fundamental outlook for corporate America is being revised upward:

• Historic Revisions: Consensus estimates for 2026 S&P 500 earnings have been revised upward to a staggering 17.4%.

• Broadening Revenue Profiles: Growth is no longer a Magnificent 7 monopoly; all 11 sectors are projected to deliver year-over-year growth for both earnings and revenue in 2026, creating a diversified fundamental floor for the index.
  
  

  Source: AAM, FactSet data | Past performance is not indicative of future results.

Relevant Factors: The New Market Backdrop

While the earnings story is robust, several other factors are shaping the 2026 landscape:

• The Breadth Breakthrough: We are seeing a decisive transition from a tech-only rally to a broad-based advance. As mega-cap leaders face valuation pressure, capital is rotating into the S&P 493. This participation from cyclical and value sectors, which largely sat out the prior two years, suggests the bull market has developed legs and is building significant valuation support for its next leg.
• Record Margins: Corporate efficiency is at an all-time high. S&P 500 profit margins are projected to hit a record 13.9% in 2026, suggesting that companies have successfully navigated the affordability crisis through automation and AI (artificial intelligence).
  

  Source: AAM, FactSet data | Past performance is not indicative of future results.

The Bottom Line

Do not fear the falling P/E. In an environment of rising earnings, a shrinking multiple indicates a market that is becoming both more attractive and fundamentally sound. As prices consolidate and earnings accelerate, the setup for the second half of 2026 remains powerful.

CRN: 2026-0409-13385 R