The Big Picture

Briefing.com Summary:

*Market leadership is broadening, which is indicative of bull market action.

*Rising earnings estimates have improved P/E multiples, but elevated price-to-sales ratios reflect exceptionally high growth expectations.

*The biggest threat to the bull market is falling earnings estimates, not short-term volatility or speculative positioning.

Oil prices are plummeting; S&P 500 earnings estimates are increasing; and Wall Street strategists are raising their year-end price targets, some of which have an 8-handle on them.

It has been full steam ahead for the stock market—or it had been full steam ahead for the stock market. Truth be told, the S&P 500 has been moving sideways over the last month or so. The important element is that it has been moving laterally in close proximity to its all-time highs, so it isn't fair to claim this bull market has been put out to pasture.

No. This bull market has some fight in it still. How do we know? The mega-cap cohort has struggled over the last month, evidenced by a 5.4% decline in the Vanguard Mega-Cap Growth ETF (MGK), yet the Russell 2000 is up 1.7% over the same time, while the equal-weighted S&P 500 is up 2.3%. In fact, 65% of stocks in the S&P 500 are above their 200-day moving average.

That is the picture of a stock market broadening its buying interest. Why that is and how long it lasts remains open for debate, but in bull markets, money rotates within it and not out of it altogether.

Money tends to rotate out of the stock market and away from cyclical sectors when economic stress becomes apparent in the data and earnings estimates. That is when the bull gets put out to pasture, but it isn't going there yet.

Confidence Is High (And So Is Anxiety)

No one will deny that the semiconductor stocks have had an epic run that has been instrumental in the bull market's advance. At the same time, few can argue that these white-hot stocks weren't due for a setback. At its all-time high on June 22, the Philadelphia Semiconductor Index ("SOX") was up 107% in 2026.

As it so happens, the SOX is down 8.0% in a one-month period, with the bulk of that loss coming over the last two weeks. That hasn't upset the bull market, however.

Over the same one-month period, the S&P 500 health care sector is up 12.0%, followed by the S&P 500 financials sector, up 8.2%, the S&P 500 industrials sector, up 5.7%, the S&P 500 utilities sector, up 4.5%, the S&P 500 consumer staples sector, up 3.6%, the S&P 500 real estate sector, up 2.8%, and the S&P 500 materials sector, up 1.4%.

There has been more to the market than the semiconductor stocks, and that is a good thing. Now, ideally, it stays that way.

The upcoming Q2 earnings reporting period will have something to say about that. Confidence is high going into the reporting period, but so is anxiety after the market's powerful rally since late March.

That angst is reserved largely for the semiconductor stocks, the mega-cap stocks, and stocks tethered to the AI buildout. They are the nexus of the momentum trade that has been underpinning the major indices. Investors will monitor their results to determine if they are living up to the hype and how their post-report performance impacts market sentiment.

It will matter given the collective market-cap weight they carry, particularly if poor price action or qualitative commentary about demand conditions scares investors away from other stocks. To be fair, it is possible for them also to drive an upside breakout from the sideways action with results that prompt yet more upward revisions to earnings estimates.

Where Valuations Get Dicey

The forward 12-month EPS estimate for the S&P 500 stands at $366.83 today versus $329.78 at the end of the first quarter and $308.38 at the end of 2025, according to FactSet.

The upward shift in earnings estimates has actually outpaced the price gain in the S&P 500 this year. From a P/E standpoint, then, the market is less expensive today than when the year began, trading with a forward 12-month P/E multiple of 20.3x versus 22.2x at the start of the year.

A lot of that has to do with the semiconductor companies, where earnings estimates have exploded on the huge demand for memory and storage needed for the AI buildout. They are accounting for nearly half of the projected earnings growth rate of 23.3% for Q2.

A forward P/E of 20.3x versus a 10-year average of 19.0x isn't extreme, but it is still above average.

Where valuations get dicey are in the market cap-to-GDP ratio and the price-to-sales ratio. The former is a favorite gauge of Warren Buffett, who said one is playing with fire when that ratio approaches or exceeds 200%. Today it sits at 236% versus 143% at the peak of the dot-com bubble. That comparison deserves some context, however, because today's market is dominated by highly profitable companies with much higher margins than those that led the dot-com era.

In turn, the forward 12-month P/S ratio for the S&P 500 is higher today than it was at the peak of the dot-com bubble. That isn't a full-fledged indictment of valuation risk. After all, the market's biggest companies have some of the highest gross margins and are at the leading edge of the AI buildout. 

The elevated P/S ratio reflects elevated expectations that they will maintain or expand their high gross margins and continue to deliver strong revenue growth. What satisfies investors as "strong" is relative, but all else equal, it becomes more challenging to deliver on growth expectations the larger one's revenue base grows. And unlike earnings growth, sales growth is harder to manipulate.

Even with healthy revenue growth, a reversion in margins could cause the P/S multiple to compress.

The Biggest Risk

The bull market has run mostly with blinders on since March, but the trading/investing environment is not without its risks.

• Inflation remains elevated, even with the drop in oil prices, meaning the Fed has less scope to turn easy with its monetary policy.
• Real average hourly earnings have been negative for three months in a row and are a potential deterrent for discretionary spending that would be a drag on economic growth.
• Earnings expectations are extremely high, creating a tough bar to hurdle and a basis for reversion to the mean if there is a disappointment.
• There is a lot of speculative energy in the market that has been fueled by increased leverage. That is not unusual in rising markets, but elevated leverage can amplify market declines if sentiment reverses.
  • Based on FINRA data, margin debt relative to GDP is at a record 4.44%, leaving it well above its 3.03% long-term average. 
• There is potential for an intervention to stem the Japanese yen's weakness against the dollar, which could lead to a sharp unwinding of yen-based carry trades.

The market is never without its risks. A key to the market's performance is how risk manifests itself and what it portends for the economy and earnings.

The unwinding of a carry trade, for instance, can be sharp and painful, but that unwinding alone is more of a mechanical thing than a fundamental obstacle. Accordingly, it typically doesn't have long-lasting impact and is apt to be seen as a buying opportunity when price levels and the speculative excess reset.

The biggest risk is the one that forces earnings estimates lower and is believed to have some longer-lasting duration (e.g., a recession or a stark slowdown in demand). That risk exists in the market's consciousness, but price action to this point implies it is still a back-of-the-mind consideration.

Briefing.com Analyst Insight

This is a market that still trusts in the earnings growth outlook, which is why it is a bull market that still operates with a buy-the-dip mindset and a proclivity to rotate within itself when it thinks some industry groups/sectors have gotten ahead of themselves.

The bull market has been on the playground since the end of March, but now it is on the proving ground with the turn to the second half of the year. A lot of good news and outcomes were priced into stocks during the second-quarter rally. The third quarter will be about backing it up—or not.

This bull market should have more room to run if earnings continue to meet and exceed high expectations. If not, then the bull market may just be put out to pasture for a bit.

--Patrick J. O'Hare, Briefing.com