S&P 500 Why Not Much Higher? Stock Talk Update, July 17, 2026

Good evening, everyone.

Here’s something that does not seem to make sense to many investors about the US stock market, S&P500, the last 2 months.

Over the last 6-8 weeks, nearly every major Wall Street strategist has raised their year-end target for the S&P 500. Citi.Goldman Sachs.Morgan Stanley.J.P.Morgan.Barclays.

Most now see the market finishing 2026 somewhere between 7,800 and 8,100. There actually are a few optimists that have ratcheted targets up to nearly 8500.

So here is the obvious question. If now stocks should be worth more, why has the market not already ripped higher? After managing equity portfolios for more than 35 years, I would tell you there are likely two big reasons. Neither has anything to do with weak earnings.

But both have to do with real-time market valuations.

So here we go, the first point –

Overall S&P500 EARNINGS look OUTSTANDING, accelerating and heading higher 2-3q26, BUT CASH FLOW IS UNDER PRESSURE.

Let’s start with the good news. Corporate America is making money.

FactSet estimates second-quarter S&P 500 earnings growth at 23.6%.

If that proves accurate, it would be the second consecutive quarter above 20% earnings growth. Goldman Sachs also expects another strong quarter, supported by a solid macro backdrop and the ongoing AI investment boom. That is the bullish part of the story.

But it seems like investors are already looking beyond earnings.

They are asking a second question: how much cash are these companies actually keeping? Today’s AI leaders are spending enormous amounts of money on data centers, GPUs, networking equipment, and power infrastructure. Those investments may create major future growth, but they can reduce free cash flow today.

Goldman notes that hyperscaler capital spending estimates rose by more than 100 billion dollars after last quarter’s reports. Investors are no longer asking only whether AI revenue is growing. They are asking whether this spending produces an acceptable return on capital.

That is the critical distinction.

Earnings can rise. Revenue can rise. But if every dollar is immediately reinvested, shareholders may not see the cash flow right away. It might be quarters or even years before a shareholder sees a positive marginal ROIC on that extra cash.

That does not mean the AI cycle is fake. It means the market wants proof. The market is asking whether this spending becomes future free cash flow or just today’s higher cost base.

POINT TWO – INTEREST RATES ARE HOLDING DOWN THE MULTIPLE

Now let’s look at the second reason the market has not moved much higher.

Interest rates. The 10-year Treasury yield has moved back toward 4.6%, roughly 25 to 35 basis points higher during the second quarter. That may not sound like much, but to the stock market, it matters. It particularly matters from a low base like 4-5%.

A stock’s value is based on future cash flows. Higher interest rates reduce the present value of those future earnings. Said simply, when a risk-free Treasury bond pays more, investors are less willing to pay a premium multiple for stocks. The higher Treasury yield can start to compete better with the riskier stock market higher “potential” returns.

VALUATION IS THE GATEKEEPER

FactSet shows the S&P 500 forward 12-month P/E ratio at 20.5 times earnings.  The back of the envelope PE right now at a 10-yr yield of 4.565% is 21.9x, just short of 22x.

That is above the 5-year average of 19.9 and above the 10-year average of 19.0. Of course interest rates went much lower during much of that time.

FactSet EPS estimates for 2026 are $340.75 and 2027 its $398.43/s. Right now that would triangulate to a S&P500 of 7467 on 2026 EPS, and the markets sit at around 7525 right now.

So earnings are strong, but the market looks fairly value based on growing 2026 EPS. That means continued higher rates might continue to offset some of the higher earnings.

This is why the S&P 500 can have excellent earnings growth and still not go straight up.

The earnings are doing their job. The nominal interest rate rising is the limiter to PE expansion, particularly when FCF is declining like now.

The simple formula still rules. Stock price equals earnings times the P/E multiple.

If earnings rise 20%, but the P/E multiple falls or fails to expand, the market can climb much less than investors expect. That is exactly what is happening now. It happened in the 2h25 and the 1h26 YTD,

Earnings are advancing. In fact, EPS are accelerating 1-3q26 in the overall SP500, But higher Treasury yields and declining free cash flow questions are keeping the market multiple constrained. This combined with the fact that many of the spenders on AI are now issuing stock and borrowing money to do it, increasing their overall funding costs and the risk to the buildout.

WHAT COULD UNLOCK THE NEXT LEG HIGHER

So what could unlock the next sustained leg higher? Two things. First, the 10-year Treasury yield stabilizes or falls, and 2-3q EPS reports come through and are rewarded. Second, AI spending produces visible revenue, and free cash flow returns in addition to its reported eps gains. If those happen, the path to 8,000 or even higher in 2027 becomes much easier.

If rates rise again or AI spending disappoints, the market will have a hard time doing more than grind, rather than surge.

So the answer to today’s question is not complicated. The market is not ignoring earnings.

It is asking what those earnings are worth when cash flow is being reinvested aggressively and Treasury yields are trending higher not lower. This is a healthier market than one driven only by excitement. Earnings are doing the work, but interest rates and negative FCF at many large tech companies are tempering the excitement.

Respect earnings momentum, but do not ignore the nuances of interest rates and FCF.

Those are the two swing factors.

I’m Chris Perras with Oak Harvest Financial Group.

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