Stock Talk - S&P 500 Why Not Much Higher? Stock Talk Update, July 17, 2026

Starting point is 00:00:06 Good evening, everyone. Here's something that doesn't seem to make sense to many investors about the U.S. stock market, at least the S&P 500, the past two months. Investors, over the last 6 to 8 weeks, nearly every major Wall Street strategist has raised their year-end target for the S&P 500. City, Goldman, Morgan, Stanley, J.P. Morgan, Barclays, most now seeing the market finishing 2006, somewhere between 7,800 and 8,100. There are actually a few optimists out there that have ratcheted up targets to nearly 8,000. 8,500. So here's the obvious question. Now, stocks should be worth more. Why hasn't the mark it already ripped higher? After managing equity portfolios for more than 35 years, I would tell you there are likely two big reasons. Neither has anything to do with weak earnings. Both have to do with real-time market valuations. So here we go. The first point. Overall, S&P 500 earnings

Starting point is 00:00:59 outlook is outstanding, accelerating heading into the second and third quarter, but cash flow is under pressure? Let's start with the good news. Corporate America is making money. Fax set estimates second quarter S&P 500 earnings growth at 23.6%. If that proves accurate, it would be the second consecutive quarter above 20% earnings growth. Holden Sachs also expects another record quarter, supported by solid macro backdrop and ongoing AI investment boom. That's the bullish part of the story. It seems like investors are already looking beyond earnings. They're asking a question, how much cash are these companies actually spending? Today's AI leaders are spending enormous amounts of money on data centers, GPUs, networking equipment, and power infrastructure.

Starting point is 00:01:46 Those investments may create major future growth, but they can reduce free cash flow today. Goldman notes that hyperscale CAPEX spending estimates rose by more than $100 billion over the last quarter's reports. Customers are no longer asking only whether AI revenue is growing. they're asking whether this spending produces acceptable return on capital. That's a very critical distinction. Earnings can rise, revenue can rise, but if every dollar immediately invested, shareholders may not see the cash flow right away. It might be quarters or even years before a shareholder sees a positive original return on vested capital on that extra cash. That does not mean the AI cycle is fake.

Starting point is 00:02:28 It means the market wants proof. The market is asking whether this spending becomes future free cash flow or just today's higher cost base. So the second point, interest rates are holding down the market multiple. Let's look at the second reason. That's the reason markets aren't moving higher yet. Interest rates, the 10-year treasury yield has moved back towards 4.6% roughly 25 to 35 basis points higher during the second quarter. That may not sound like much, but to the stock market, it matters particularly when rates are at a low base like 4 to 5%. percent. Stock values based on future cash flows. Higher interest rates reduce the present value of those

Starting point is 00:03:05 future earnings. Said simply, when a risk-free treasury bond pays more, investors are less willing to pay a premium multiple for stocks. The higher the treasury yield can start to compete better with riskier stock market higher potential returns. Yes, valuation gatekeeper is interest rates. Fact shows the S&P 500 forward 12-month PE ratio and about 20.5 times earnings. Back in the envelope PE right now on 10-year yield of 4.565% is around 21.9, just short of 22 times earnings. That is above the five-year average of about 19.9, above the 10-year average of about 19. Of course, interest rates went much lower during that time frame. Facts that earnings estimates for this year are $340.75.

Starting point is 00:03:53 For next year, 2007, it's $398. Right now, that would triangulate to an S&P 500 around, 7467 on 2026 estimates, and the market sits around 7525 right now. So earnings are strong, but the market looks fairly valued based on growing 2006 EPS. That means continued higher rates might continue to offset some, the higher earnings that are forthcoming. That's why the SP 500 can have excellent earnings growth and still not go straight up. The earnings are doing the job. The nominal interest rate rising is a limiter to the PE expansion, particularly when free cash flow is declining like now. Simple formula still rules. Stock price equals earnings times

Starting point is 00:04:35 the PE multiple. Earnings rise 20%, with the fee multiple falls or fails to expand, the market can climb much less than investors expect. That's exactly what is happening now. It happened to the second half of 2025 and so far year to date. earnings are advancing. In fact, EPS are accelerating first through third quarter of overall S&P 500, but higher treasury yields and declining free cash flow questions are keeping the market multiple constrained. This combined with the fact that many of the spenders on AI are now issuing stock and borrowing money to do it, increasing their overall funding costs and risk to the buildout.

Starting point is 00:05:13 So what could it unlock the next leg in stocks higher? What could do that in the future? Two things. First, the 10-year treasury yield could stabilize or fall, and second or third quarter earnings reports come through as rewarded. Or second, AI spending produces visible revenue and free cash flow returns in addition to its reported earnings gains. If those happens, the path to 8,000 or even higher in 2007 becomes much easier.

Starting point is 00:05:39 Rates rise again or AI spending disappoints. The market will have a hard time doing more than grind rather than surge. So the answer to today's question is not complicated. The market is not ignoring earnings. It is asking what those earnings are worth when cash flow is being reinvested aggressively and treasury yields are trending higher, not lower. This is a healthier market that one driven by only excitement. Earnings are doing the work, but the interest rates and negative free cash flow at many large tech companies are tampering the excitement.

Starting point is 00:06:10 Investors respect earnings momentum, but don't ignore the nuances of interest rates and free cash flow. Those are two swing factors. I'm Chris Paris with Oak Harvest Financial Group and have a great weekend. All content contained with an Oak Harvest podcast expresses the views of the speaker and is for informational purposes. only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or legal advice,

Starting point is 00:06:51 or an offer or solicitation to buy or sell securities. Indexes such as the S&P 500, are not available for direct investment and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - S&P 500 Why Not Much Higher? Stock Talk Update, July 17, 2026

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.