Investors Are Walking on Eggshells These Days. Yet the S&P 500 Index Is on the Cusp of Doing Something Extraordinary for Only the 4th Time in 20 Years.

While the market has held up fairly well given all the turbulence this year, it's hard not to go a day without hearing about concerns. These are certainly understandable, given everything that's happened since the COVID-19 pandemic.

High interest rates and the longest inverted yield curve in history suggested that a recession was almost a certainty, yet there hasn't been one. Meanwhile, there have also been significant concerns about stagflation, another worrisome scenario that would be bad for the market.

Yet while it feels like investors have been walking on eggshells for years, the S&P 500 (SNPINDEX: ^GSPC) is on the cusp of doing something extraordinary for only the fourth time in the past two decades. Let's dive in.

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Analysts continue to pencil in strong earnings growth

One concern that bears have frequently pointed out is the S&P 500's elevated valuation since the pandemic. While it varies depending on the data source you use, the S&P 500 currently trades at 28.5 times trailing earnings, well above its five-year average, which has been elevated by historical standards.

S&P 500 P/E Ratio data by YCharts

The bulls could argue that the market deserves a premium because it has posted strong earnings growth over the past few years. Much of this has been led by large-cap growth and tech companies, which have seen 24% earnings growth in every quarter since the third quarter of 2023, according to a team of strategists at Deutsche Bank.

But with earnings season having just kicked off, Wall Street analysts on average expect the S&P 500 to generate more than 16% year-over-year growth in the first quarter of 2026, the highest level in four years. Deutsche Bank's head strategist Binky Chadha thinks that number will actually be over 19%.

"Equity investor positioning, meanwhile, is significantly underweight and in line with an imminent collapse in earnings growth," Chadha and his team said in a recent research note. "Positioning is notably low for sectors in the market crosshairs currently, like financials and tech, especially software."

Even the 16% consensus growth is an extremely high level "rarely expected at the start of any earnings season" but which supports a healthy macro backdrop, weakness in the U.S. dollar, and cyclical growth tailwinds.

Furthermore, according to Chadha and his team's analysis, consensus earnings growth has only been this strong three other times over the past 20 years. Most have actually come after significant sell-offs and financial crises, such as the Great Recession in 2008-2009, and following the brunt of the COVID-19 pandemic. It also happened after significant corporate tax cuts were implemented in 2018.

The market's resilience makes sense

Earnings growth helps explain some of the market's resilience in recent years. Despite everything that's happened, including the pandemic, an inverted yield curve, rapidly rising interest rates, the 2023 banking crisis, President Donald Trump's tariffs, and even the Iran war, the market is still experiencing a multi-year expansion and has generated phenomenal returns in recent years.

Now, there have been significant sell-offs for short periods, but they have been followed by rapid rebounds. It's also possible that analysts have not yet incorporated the impact of surging oil prices from the Iran war into their forecasts. Even if tensions between the U.S. and Iran die down and a broader, long-term agreement is struck in the near term, oil prices will likely remain higher than they were at the start of this year for the foreseeable future.

Investors should also remember that Wall Street analysts typically only have reliable estimates for a year or two out, and these can change each quarter, so it's certainly something to watch for. If analysts revise earnings lower, the market will feel it, and sometimes unforeseen events can come out of nowhere, leading to quick revisions.

However, if earnings estimates stay where they are or rise, there's no reason the market won't follow them higher.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.