What Really Stops a Bull Market? It's Not What You Think.
By Yogurt · 2026-08-29 · Market Analysis
Rates, geopolitics and round numbers cause volatility — but forward earnings end bull markets. Here is what the current earnings trend and a 20.7 forward P/E actually say.
Forget the Headlines, Watch the Profits
In a bull market that seems to defy gravity, it's easy to get nervous. Pundits scream about bubbles, headlines predict imminent doom, and every round number the S&P 500 crosses is met with warnings of a coming crash. But what if we've been looking at the wrong signals?
While things like interest rates, geopolitics, or the sheer duration of a rally can cause short-term volatility, they aren't what typically ends a powerful bull market. History shows the real driver is something much more fundamental: corporate earnings.
The Tango of Price and Profits
According to analysis from Ed Yardeni, there's a simple, powerful relationship between the S&P 500's price and its forward earnings—the projected profits of its companies over the next 12 months. As long as forward earnings are trending up, the market has a fundamental reason to climb. The music stops when the earnings outlook turns sour.
Think of it like a dance. The market's price and forward earnings move in a tight tango. When the earnings forecast starts to dip, the market's price follows. This isn't just theory; it's history.
- In 2000, the dot-com bubble burst as forward earnings began to roll over. An investor watching this metric would have seen the warning signs.
- In 2008, the financial crisis saw a similar pattern. The price drop was followed closely by a sharp decline in earnings expectations.
So, What Are Earnings Telling Us Now?
This brings us to the critical question: where are we today? Contrary to the fearful headlines, the earnings picture is remarkably strong. We are seeing analysts issue upward revisions to their profit forecasts. And this isn't just a story about a few mega-cap tech stocks. The optimism is broad-based, spanning across large-cap (S&P 500), mid-cap (S&P 400), and even small-cap companies.
But Isn't the Market Expensive?
A common rebuttal is that valuations are stretched. However, looking at the forward Price-to-Earnings (P/E) ratio of the S&P 500, we see a different story. The current forward P/E is approximately 20.7. While higher than deep historical averages, it's significantly below the peak of 25 reached in 2020.
More importantly, the trend is our friend. A market peak is typically characterized by a rising P/E ratio. Today, we're seeing the opposite. The P/E ratio has been declining from its highs, suggesting that earnings growth is outpacing price growth.
The Takeaway
While no one can predict the market's every move, the most reliable indicator of a bull market's health is pointing in the right direction. As long as companies are expected to earn more in the future, there is a solid foundation for the market to continue its advance. Instead of panicking over headlines, keep your eyes on one thing: the forward earnings trend.