The S&P 500 Has Only Grown Earnings This Fast Twice Before. History Says This Is What Happens Next

2026 is emerging as a banner year for the S&P 500 (SNPINDEX:^GSPC). Not necessarily for the index's price growth, which is up 12.6% year-to-date, but because of its earnings growth.

Analysts now expect S&P 500 earnings per share to grow 24%-32% this year, paced by blockbuster growth from AI stocks and the Magnificent Seven, as the Magnificent Seven now makes up about a third of the index, and it doesn't include breakout stocks like Micron, which are posting EPS growth rates above 1,000%. Nvidia, for example, is expected to grow EPS by 95% this year, driven by soaring demand for its chips, which form the backbone of AI infrastructure. Amazon is on track to grow EPS by 79%, benefiting from a massive one-time equity gain on Anthropic, while also seeing its cloud business reaccelerate. Alphabet is similarly realizing a large gain from Anthropic and Space Exploration Technologies, and is expected to grow generally accepted accounting principles (GAAP) earnings by 90%.

It's rare for S&P 500 earnings to grow by 25% in a single year when it's not recovering from a recession or some kind of downturn. In fact, it's only happened two other times in the modern era. Let's take a look at what happened then and what it implies for the market today.

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1994: A hint of the tech boom ahead

1994 was an odd year for stocks. Based on the S&P 500's performance, you wouldn't suspect there was a boom in earnings as the index actually fell slightly for the year, under the weight of Fed Chair Alan Greenspan's rate hikes in the face of strong economic growth, even as S&P 500 EPS jumped 39.8%.

A number of trends supported earnings growth in 1994. The beginning of the internet boom drove demand for chips, software, and telecom hardware. Like they are today, Micron's profits soared in 1994 due to a memory shortage, portending the tech boom ahead.

Meanwhile, more established companies like Procter & Gamble were in the midst of cost-cutting and reorganizing following the recession in the early 1990s, which drove the S&P 500's corporate profit margin from roughlly 5% in 1993 to about 6% in 1994. GDP growth was also strong at 4.1% that year.

1999: The dot-com boom peaks

1999, the other time in modern history that the S&P 500 EPS jumped, was one of the best years in stock market history, as the Nasdaq jumped 86% and the S&P 500 rose 19.5%. S&P 500 earnings were up 27.7%, benefiting in part from preparation for the Y2K bug.

While unprofitable dot-com stocks soared that year, more established tech companies led the earnings charge, including those that provided the infrastructure for the dot-coms, like Microsoft, IBM, and Intel, as they benefited from demand from start-ups.

That year would prove to be the last hurrah for the boom, as tech stocks peaked in 2000 and then crashed, and the bust was made worse by the stratospheric gains of 1999.

What it means for the current market

The 2026 stock market seems to have elements in common with both 1994 and 1999. In all three years, the Fed was hiking interest rates, and there was also a memory shortage.

Being in the fourth year of an AI bull market, 2026 would seem to more closely resemble 1999 than 1994, as stocks hadn't begun to rise in 1994, despite evidence of the budding internet boom.

However, for investors fearful that we are in this boom's version of 1999, there are some important differences. The leading tech stocks, like Nvidia, trade at reasonable valuations, a sign that investors have been hedging against an ongoing boom, and there isn't the same IPO mania during the dot-com boom that drove skyrocketing share prices in a number of unprofitable companies. The AI boom is dominated by a relatively small number of companies. OpenAI is losing money, but Anthropic is now profitable on an adjusted basis, and SpaceX is on the verge of profitability, according to Wall Street analysts. The established publicly traded companies are making huge profits.

We're not about to see hundreds of companies go bankrupt, triggering a broader crash like the one we saw during the dot-com era.

Overall, the lesson from history is muddled here, but I think there are enough resemblances to 1994 to conclude that we're not yet at the stock market peak. Valuations are still reasonable, especially compared with expected growth, and there's no risk of a broader start-up collapse.

Jeremy Bowman has positions in Amazon, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Intel, International Business Machines, Micron Technology, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.