Stock markets have spent much of the past few years reaching new highs, even as investors wondered whether corporate earnings could keep pace with the hype around AI. That question is important because, over time, a company’s stock price ultimately needs to be supported by the earnings it generates. Recently, that relationship between market prices and underlying earnings has begun to look somewhat healthier.
Q2 earnings have been considerably stronger than expected, with growth extending well beyond the largest technology companies. The broad stock market is not suddenly inexpensive, but improving profits are helping companies grow into the higher valuations that have concerned investors in recent years.
Measuring Value
One common way investors evaluate companies is the price-to-earnings, or P/E, ratio. In simple terms, this compares the price investors are willing to pay for a company to the earnings that company generates. A higher P/E ratio is not inherently good or bad, as investors may reasonably pay more for a business they expect to grow rapidly in the future. At the same time, higher P/E ratios can leave less room for error, since more of the price depends on future growth meeting investors’ expectations.
There are two ways for elevated P/E ratios to decline. First, stock prices can fall, which is what investors generally fear when valuations are above normal levels. Alternately, earnings can increase and catch up to prices. Recently, we have been seeing more of the latter. At the end of June, the S&P 500 traded at approximately 20.4 times expected earnings over the following twelve months. By August 7, that figure had declined to 20.0, according to FactSet. These valuations remain slightly above their longer-term averages, but the direction is notable: stronger earnings have allowed valuations to ease, even while stock prices have remained near record levels.1
A Standout Quarter
One reason we’re writing about this is that the Q2 earnings season has been unusually strong. With nearly nine out of ten S&P 500 companies having already reported Q2 results, 86% had exceeded analysts’ earnings expectations. So far, year-over-year S&P 500 earnings have risen more than 50%, the strongest pace since 2021.2
There is also encouraging breadth underneath those numbers. Rather than being limited to a handful of technology companies, earnings have increased across 10 out of 11 sectors in the S&P 500, with sectors including financials, industrials, and energy all contributing to the improvement.3 Broader participation does not guarantee that earnings growth will persist, but it suggests the earnings story extends beyond only the largest AI-related companies.
Nevertheless, artificial intelligence remains an important part of the current market. Technology-sector earnings are growing especially quickly, supported by continued demand for semiconductors, cloud computing, data centers, and other AI infrastructure. Capital spending by the largest technology companies continues to flow through to suppliers and other parts of the economy. Optimism and high expectations related to this theme have helped push stock prices higher over the past several years, and now it is increasingly showing up in corporate profits as well.
An Important Asterisk
The headline numbers require some context. Alphabet and Amazon reported unusually large gains this quarter related to investments in other companies. Amazon’s second-quarter net income included $53.4 billion of non-operating income primarily related to its investment in Anthropic, while Alphabet recorded approximately $98 billion of gains from investments in Anthropic and SpaceX.4
While these gains make the overall S&P 500 earnings numbers look considerably stronger, removing them does not make the broader earnings story disappear. Even without Alphabet and Amazon, FactSet estimates that S&P 500 earnings growth would still be roughly 32% in Q2. These are unequivocally strong results, outpacing both the expected +23% earnings growth for the S&P 500, as well as its 15-year average of +11.2% annual earnings growth.5
Growing Into Prices
None of this means that valuation concerns have disappeared. Stock prices still reflect substantial expectations for future growth, particularly as companies invest heavily in artificial intelligence and other areas where the eventual return remains uncertain. Economic conditions, inflation, and geopolitical developments will also continue to influence corporate profits and investor sentiment.
What has changed is the fundamental support beneath today’s market. After several years in which prices often moved faster than earnings, stronger profits are beginning to narrow that gap. For long-term investors, that is an important reminder that record highs and elevated valuations are only part of the picture. Ultimately, the durability of a market advance depends less on the level of an index on any particular day than on the ability of the underlying businesses to keep growing their earnings over time.
Resources
1 & 2 S&P 500 Earnings Season Update: August 7, 2026. FactSet
3 US stock market could ride earnings strength to more gains after S&P 500 hits record. Reuters
4 Anthropic and SpaceX just handed Google the biggest profit quarter in company history. Yahoo! Finance
5 S&P 500 Earnings Growth Rate by Year. Multpl
