Wall Street posts three-week losing streak as Iran war batters sentiment
In yesterday’s article, we highlighted the relationship between South Korean exports and U.S. corporate profits. Simply put, the boom in export data reflects strength in the technology supply chain, which, in turn, suggests a healthy environment for technology industry profits in the U.S.
Another signal of earnings strength is the ISM Index. Historically, the Institute for Supply Management (ISM) Manufacturing Index has correlated well with S&P 500 earnings growth because earnings are more manufacturing-driven than the more consumer-oriented economy measured by gross domestic product (GDP). That’s why the strong reading on the ISM — the January headline index came in at 52.6 — caught our attention earlier this week. The nearly five-point jump in the index lifted it to its highest level since June 2022 and first expansionary reading (over 50) since March 2024.
The accompanying chart illustrates the recent improvement in the outlook for manufacturing activity. The survey is timely, as the index reflects future plans for purchasing managers (whether they intend to spend more or less), and therefore has proven to be a useful signal of future profits a quarter or two out. The strong January reading (released February 2) points to further earnings gains ahead. The new orders reading from the ISM, which is more forward-looking, made an even bigger move — from 47.4 in December to a firmly expansionary 57.1 in January.
Pickup in ISM Manufacturing Data Offers Potential Positive Earnings Signal
Source: LPL Research, Bloomberg, FactSet 02/04/26
The two signals give us confidence in corporate America’s ability to grow earnings at a double-digit pace for at least the next two quarters, and probably longer. Other reasons for our earnings optimism include:
- The expected nearly 40% increase in capital investment by AI hyperscalers in 2026 and related productivity benefits.
- Fiscal stimulus is kicking in now and includes roughly $130 billion in consumer tax cuts and a similar amount of business tax incentives that go into effect this year. At the same time, the impact of tariffs is fading and will likely soon be fully absorbed.
- The U.S. economy is tracking to above-trend growth, likely providing a boost to company revenue. LPL Research now expects 2.5% economic growth in 2026 (on a real, inflation adjusted GDP basis), up from prior forecasts near 2%.
- Revenue for the S&P 500 in aggregate is expected to increase 7% in 2026, so little margin expansion will be needed to reach 10% earnings growth this year.
- Earnings estimates for 2026 have risen steadily since tariff threats were pulled back in the spring of 2025. This rare observation is an encouraging sign and increases the likelihood of strong earnings gains this year.
Earnings provide a strong foundation for stock prices. We remain confident that, if earnings growth strengthens in 2026, as we anticipate, the stock market will follow suit. As we wrote in Outlook 2026 and we still believe today, we expect earnings growth rather than rising valuations to drive stocks higher this year.
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Important Disclosures
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