Key facts
- The S&P 500 is trading less than 3% below its record high.
- U.S. Treasury and overseas government bond yields have surged recently.
- AI-driven profit growth and economic resilience are supporting stocks.
- Second-quarter S&P 500 earnings are projected to grow 53% year-on-year.
- U.S. job growth accelerated in August.
- The Russell 2000 index has outperformed the S&P 500 this year.
Despite a significant increase in U.S. Treasury and international government bond yields over the past few weeks, the S&P 500 has remained resilient, trading just below its August 13 record high. This market behavior deviates from historical patterns where rising yields typically pressure stocks, particularly high-growth sectors.
Investors are attributing the current stability to several factors. The ongoing artificial intelligence boom continues to fuel expectations of substantial profit growth for major tech companies like Apple and Microsoft, which are trading near their own record highs. While some chip stocks have seen pullbacks, strategists like Laura Cooper at Nuveen see a tightening supply-demand dynamic for memory chips next year, suggesting continued strength in the sector.
Corporate earnings also provide a strong foundation. Second-quarter earnings for S&P 500 companies are projected to grow by 53% year-on-year, with LSEG I/B/E/S data indicating an expected 35% profit jump in 2026. Companies like Alphabet and Amazon have reported robust growth in their cloud computing businesses, driven by AI demand. Angelo Kourkafas of Edward Jones noted that despite headwinds from rising bond yields and oil prices, strong earnings growth remains a key support for stocks.
The U.S. economy's resilience is another significant factor. Analysts at Aberdeen highlighted that consumers, labor markets, and corporate balance sheets have performed better than anticipated, defying recession expectations. U.S. job growth accelerated in August, particularly in the leisure and hospitality sector. Furthermore, consumer spending, which accounts for two-thirds of U.S. economic activity, was revised upward to 3.4% for the first half of the year, indicating sustained demand.
Even smaller companies, typically more vulnerable to rising interest rates due to their reliance on external borrowing, have shown strength. The Russell 2000 index of U.S. small-cap companies has outperformed the S&P 500 this year, supported by solid earnings and investor appetite for market segments beyond large-cap technology.