Never since 1950 have the S&P 500's price and earnings both been so far above the historical trend at one time, one strategist says
The S&P 500's price and earnings have risen to records in tandem.
Bulls love to crow about how the torrid rise in semiconductor stocks and other names tied to the artificial-intelligence bottleneck trade has been justified, in a sense, by these companies' rapidly growing earnings - a trend that Wall Street analysts expect will continue for at least the next few years.
Lately, however, some strategists have begun to wonder whether these great expectations might be a little too optimistic. From the rapid advance of Chinese models to growing local opposition to data-center construction in the U.S., the possible threats to the hyperscalers' ongoing development binge are increasing.
This was on the mind of one Wall Street veteran this week, at a time when the S&P 500 SPX appeared to be stalling out just below its most recent record high. Despite a boost from the consumer-price index report for June released earlier on Tuesday, shortly before noon Eastern time the index was still trading 0.9% below its June 2 record closing high.
Jim Paulsen, who formerly served as chief investment strategist at the Leuthold Group, pointed out in a Substack post shared with MarketWatch that while Wall Street remains optimistic about the market's prospects through the end of 2026, the rally might already be nearing capacity.
Paulsen pointed out that even though the S&P 500 is up over 10% this year, the index's forward price-to-earnings ratio - a popular metric used to gauge whether a stock is cheap or expensive - has actually declined. This is because analysts have raised their earnings expectations even more aggressively.
History suggests these expectations might have gotten ahead of themselves, and that a market reckoning could be in order.
Never since 1950 have both the S&P 500's price and earnings per share simultaneously been this far above their respective historical trendlines, according to Paulsen.
The S&P 500's price is more elevated than it has been 95.9% of the time since 1950, while EPS is more elevated than it has been 99.6% of the time, according to Paulsen.
But in the past, when the two metrics have gotten close to these levels, suboptimal returns have followed, regardless of where valuations stood.
Historically, when both S&P 500 prices and EPS differentials were at or above their respective 90th percentile - like they are now - the future one-year average percentage price gain was minus 10.1%, according to Paulsen.
Comparatively, when both were in their lowest 10th percentile, the average future S&P 500 price return was 29.5%.
The high levels that are being seen have only emerged in the last year. In March 2025, the S&P 500 was well within historical norms dating back to 1950, with prices at around 21% above trendline and EPS at 28% above its trendline.
Compare that to the levels at the end of June, when the S&P 500 was trading at 55% above its trendline average and its EPS was at more than 60% of its average. Such a wide spread between the current and average price hasn't been seen since the top of the dot-com run. EPS, meanwhile, has risen further above its trendline than at any other point during the entire post-World War II era. Some analysts have said the current pace of expected earnings growth is similar to what has typically been seen coming out of a recession.
Elevated prices and EPS don't guarantee that a correction is imminent. These conditions have persisted for months in the past, and the index has continued to climb.
While it could be the case that recent "watershed innovations," such as AI, quantum computing and robotics, mean conditions in the market have materially changed relative to history, Paulsen maintains that these transformations "will probably not overwhelmingly nor sustainably alter the historical norms between stock prices, earnings, and the economy."
If that is the case, "then the stock market is currently nearing capacity," Paulsen said. Because both price and EPS have already risen so much during just the last year, "the capacity for either price or EPS to continue outpacing expectations is probably dwindling," he concluded.
-Julian Torres
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(END) Dow Jones Newswires
July 14, 2026 13:12 ET (17:12 GMT)
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