Ed Yardeni Just Raised His 2026 Price Target on the S&P 500 to 8,400. 3 Ways The Market Can Get There.

Despite concerns about the impressive gains in the stock market during the past three years and extreme spending on artificial intelligence, the broader S&P 500 (SNPINDEX: ^GSPC) is now up roughly 12.3% this year and sits at about 7,756 (as of Aug. 17).

Well-known market strategist Ed Yardeni of Yardeni Research thinks more gains are coming. Yardeni recently raised his price target on the S&P 500 to 8,400, implying an additional 8% increase. If this prediction comes to fruition, the S&P 500 will enjoy its third consecutive year at least 20% gains.

Nobody knows what will happen, but here are three ways the S&P 500 can continue its strong year and finish at 8,400.

Image source: Getty Images.

1. "Fabulous earnings momentum"

Yardeni and many other bulls have long argued that the market will keep going higher as long as earnings continue to grow and beat current estimates while forward estimates keep rising.

Right now, Yardeni says there is simply "fabulous earnings momentum," largely driven by a strong economy. And he's not wrong. In the second quarter, the S&P 500's earnings rose by more than 50% on an annual basis, according to FactSet. That's with 88% of S&P 500 companies reporting.

Additionally, 76% of companies that reported delivered a positive earnings-per-share surprise relative to average estimates. On Aug. 7, the S&P 500 had a forward price-to-earnings ratio of 20, only slightly higher than the 10-year average of 19.

By year-end, Yardeni expects 2027 S&P 500 EPS estimates to top $400, which would pave the way for an 8,000-plus S&P 500 target. Remember, valuations also rise when growth does, so the market may end up being valued at well over 20 times forward earnings.

2. An end to the Iran war

Another way the market could rise is if there is a real end to the Iran war. Although much of the military action has died down since June, tensions between the U.S. and Iran remain elevated, and there's no clear answer to when the conflict will reach a long-term conclusion.

Even if the hostilities are more muted, a fluid situation will likely keep traffic through the Strait of Hormuz very low, which will continue to keep oil and gas prices higher. This will hurt consumers and, therefore, the U.S. economy, so the longer this critical oil passage remains under threat, the greater the likelihood that S&P 500 earnings will eventually slow.

If the war is resolved, inflation could slow, which would also keep the Federal Reserve on hold on interest rates. Right now, investors see a real chance that the Fed raises rates before the year ends.

The higher rates go, the more pressure the economy faces due to elevated borrowing costs.

3. AI continues to produce

Whatever investors think of the artificial intelligence (AI) boom, there's no dispute that AI is currently driving economic growth. The hyperscalers plan to spend more than $700 billion on AI infrastructure this year and even more next year, driving consumption and job growth.

In the first quarter of the year, Oliver Allen, an economist at Pantheon Macroeconomics, estimates that AI investment accounted for half of overall gross domestic product (GDP) growth, which rose at a 2% annualized rate.

The hyperscalers have begun to face market pushback for spending heavily on AI, with investors concerned the investment won't yield adequate returns. In 2025, the market seemed to blindly reward increased AI capital expenditures. Now, investors want to see proof these investment are paying off.

Companies like Microsoft and Amazon, which reported evidence of this in their second-quarter earnings reports, saw their stocks rip higher. Meanwhile, companies like Meta Platforms that couldn't demonstrate progress from their spending experienced a significant sell-off.

If the hyperscalers, which capture a large share of the market, can continue to demonstrate that their investments are paying off, the market should continue to perform well.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, FactSet Research Systems, Meta Platforms, and Microsoft. The Motley Fool has a disclosure policy.