All eyes remain fixated on the war in Iran as crude oil hits multi-year highs. Despite geopolitical tensions and ongoing uncertainty, investors also need to pay attention to the S&P 500’s first-quarter earnings season, which just kicked off.
Beyond the headlines, however, the real driver of near-term market direction may be corporate earnings—and whether strong results can justify elevated valuations.
This will play a key role in shaping the broader U.S. stock market outlook for 2026, as investors weigh strong earnings against elevated valuations and ongoing geopolitical risks.
How Did the S&P 500 Do in Q1 2026?
The war in Iran aside, the S&P 500 is experiencing its worst start to a year since 2020. As of March 31, the index was down approximately seven percent year to date. Over the first quarter, the S&P 500 also experienced daily swings of up to roughly two percent. Those are big swings for an entire index. Individual stocks experienced significantly larger moves, with NVIDIA Corp (NASDAQ:NVDA) seeing daily up and down moves of five percent to eight percent.
While most economists will blame the S&P 500’s knee-jerk moves squarely on the spike in crude oil and uncertainty about how long the war in Iran will last, the fact remains that U.S. stocks remain overvalued. And nervous investors need a reason to send the index higher.
That doesn’t mean the S&P 500 is at risk for a further sell-off, but it does mean that investors need to take a close look at their portfolio and rebalance if necessary. And, perhaps, refrain from jumping in just because the market experienced a near-term dip.
Is the S&P 500 Overvalued?
For example, according to the Shiller CAPE/PE Ratio, the S&P 500 is overvalued by around 137%. The index is currently at 37.94, compared to the historical average of 16. This means that, for every $1.00 of earnings a company generates, investors are willing to pay $37.94.
The ratio has only been higher twice: in 2000 and 2021. Despite the recent sell-off, stock valuations are still higher than they were in 1929, 1987, and 2007. (Source: “Online Data Robert Schiller,” Yale University, last accessed April 6, 2026.)
And Wall Street continues to be optimistic. That optimism is a key factor influencing the stock market outlook for 2026, even as valuation concerns persist. For 2026, earnings expectations for the S&P 500 have been getting more robust, with calls for 17% growth.
One way to determine the strength of a stock is to look at its cash. Most investors look at the price to earnings (P/E) ratio. If the P/E ratio comes down and earnings go up, the S&P 500 starts to look reasonable. For 2026, the outlook for the S&P 500’s P/E ratio is 20—that’s 20% higher than the 20-year average. (Source: “The Stock Market Is More Expensive Than It Looks. Tread Carefully,” Barron’s, April 3, 2026.)
Investors can also evaluate the S&P 500 using free cash flow (FCF) metrics. The S&P 500’s forward price to FCF ratio is 27.4, 37% higher than its 20-year average. A big difference from P/E.
FCF and earnings both look at the same thing: how much money a company makes after expenses. Where earnings include expenses that don’t use cash (like depreciation), FCF shows actual cash.
Historically, elevated valuations don’t necessarily trigger immediate declines—but they do reduce the margin for error if earnings disappoint.
How Will the S&P 500 Do in Q1 2026?
With first-quarter earnings season kicking off, the S&P 500 earnings forecast is now higher than where it was at the start of the year. The index is projected to report double-digit (13.2%) earnings growth for the sixth consecutive quarter. (Source: “S&P 500 Earnings Season Preview: Q1 2026,” FactSet, April 2, 2026.)
Admittedly, most of the companies issuing positive earnings per share (EPS) guidance for the first quarter are in the energy and information technology sectors.
On the revenue front, the S&P 500 is forecast to report annual growth of 9.7% versus 8.2% on December 31, 2025. If 9.7% is the final number, it will be the highest revenue growth rate since the 11.0% gain in the third quarter of 2022.
Depending on what happens over the coming weeks in Iran, it will be interesting to see how optimistic S&P 500 companies are for the second quarter.
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