FactSet currently expects S&P 500 earnings to grow 30% for calendar 2026, while analysts project another 27.4% increase for Q3 and 25.2% for Q4. The strength follows an exceptional second-quarter earnings season in which even excluding unusually large investment gains at Alphabet and Amazon, earnings grew roughly 32%.
According to FactSet, analysts have also been raising rather than cutting estimates heading into the second half.
Normally, that profit backdrop would be straightforwardly bullish.
The problem is the bond market.
5% Treasury Yields Change the Valuation Math
The 10-year Treasury yield has moved above 5%, recently touching 5.34%, its highest level since 2002. The jump extends a sharp bond selloff that has already become one of the biggest risks facing U.S. equities entering Q4.
Official Treasury data shows how dramatically long-term borrowing costs have risen this year.
That matters because investors can now earn more than 5% on government debt while taking substantially less risk than they would owning stocks. Higher yields also reduce the present value of future corporate earnings, which is why expensive AI and tech stocks are particularly sensitive to moves in long-term rates.
Earnings Are Doing More of the Work
So far, profits appear to be winning.
The S&P 500 is up roughly 12% this year even as Treasury yields have surged. That resilience has already appeared when the S&P 500 and Nasdaq held up despite the 10-year yield reaching 5.34%.
Valuations have also become slightly less stretched. The S&P 500’s forward price-to-earnings ratio has moved closer to 20 after trading above 22 earlier this year, meaning earnings growth rather than pure multiple expansion is carrying more of the rally.
