Don't fight the earnings cycle! Will US stocks break 8000 points this year?

Wall Street may have seriously underestimated the explosive power of the current earnings cycle.

According to TrendFocus, Jefferies issued a clear warning in its latest research report on September 14: Don't fight the earnings cycle . Driven by the dual engines of the AI investment frenzy and better-than-expected corporate earnings, the S&P 500 is expected to surge to 8,000 points by the end of this year (2026) and further reach 9,000 points in 2027 .

The report argues that despite macroeconomic headwinds such as rising 10-year Treasury yields, sticky inflation, and the midterm elections, corporate fundamentals will remain the core driver of returns .

Jefferies’ core logic is clear and compelling: it is dangerous to go against the earnings trend during a period in which earnings growth is more than twice the historical average.

Furthermore, Jefferies believes that AI-driven profit expansion is spreading from the Big Seven to a wider market, providing a more solid foundation for the market. Investors should focus on overweight sectors with strong profit revisions and macroeconomic support, such as technology, finance, healthcare, and materials , and seize this rare profit supercycle amid concerns about valuation contraction.

At the same time, Jefferies also specifically pointed out two core risks in its report: first, a substantial slowdown in the profit growth of AI-related companies , which would directly shake the foundation of the entire bull market logic; and second, the continued rise in the 10-year US Treasury yield , which would exert systemic pressure on the stock market through valuation compression.

Earnings expectations are severely underestimated; the S&P 500 aims for 8000 points.

Jefferies’ benchmark forecasts are extremely aggressive and entirely driven by earnings.

The report indicates a target price of 8,000 points for the S&P 500 by the end of 2026 , based on earnings per share (EPS) of $373 (a 35% year-over-year increase, significantly higher than the market consensus of 29%) and a price-to-earnings ratio of 21.5. Looking ahead to 2027, the baseline scenario projects the index to reach 9,000 points , based on EPS of $450 (a 20.8% increase) and a price-to-earnings ratio of 20.0.

In the most optimistic "bull market" scenario, the S&P 500 could even break through 10,500 points in 2027 (with EPS reaching $500, a growth of 34.2%); while in the "bear market" scenario with a significant slowdown in earnings, the index may fall back to 6,900 points .

The bank's core logic is that the market is pricing in the S&P 500's double-digit, above-average returns for five consecutive years , a feat that has only been seen once before since 1970, during the later stages of the tech boom from 1995 to 1999.

As long as earnings expectations remain strong, the current valuation level (76th percentile in the weighted model) is manageable.

AI remains the core engine, but the market breadth is expanding substantially.

The report's core argument is that the market systematically underestimates the power of the earnings cycle, and there is still significant room for upward revision.

Jefferies believes that the core of the profit story remains artificial intelligence (AI), but it is no longer the exclusive domain of a few giants. Data shows that about 46% of the weighting in the S&P 500 has direct or indirect exposure to AI and data center spending , and the profits of these AI-related companies are expected to surge by 60% this year, slowing to 24% by 2027.

Meanwhile, market breadth is improving significantly. While the earnings forecasts for the "Big Seven" in 2026 are as high as 45%, the earnings forecasts for the remaining S&P 500 components have also improved substantially to approximately 24% . By 2027, it is projected that more than 40% of the S&P 500 components will experience earnings acceleration.

Jefferies believes that these upward revisions to earnings and sales forecasts across industries indicate that fundamentals are becoming healthier and more diversified.

The "Big Seven" are facing pressure to rotate their squads, but their valuations have fallen to multi-year lows.

While the "Big Seven" still account for approximately 33% of the S&P 500's weighting, the environment driving their outperformance is becoming more complex. Due to record AI investments, the "Big Seven" now account for about 40% of the S&P 500's total capital expenditures (compared to just 16% in June 2023), leading to negative free cash flow (FCF) for hyperscale cloud providers, which is not expected to recover until 2028. Furthermore, the group's earnings growth is projected to slow from 45% in 2026 to 17% in 2027.

However, the good news for contrarian investors is that the valuations of the "Big Seven" have been significantly reset . In terms of absolute valuation, this group is currently at the 43rd percentile, the lowest level since January 2023 ; relative to the rest of the S&P 500, its relative valuation has plummeted from the 98th percentile a year ago to the 9th percentile today.

Macroeconomic headwinds: 10-year US Treasury yield and fiscal deficit are the biggest tail risks.

Regarding the Federal Reserve , the market is currently pricing in an 85% probability of a rate hike in September and an 83% probability of another rate hike before January 2027, but the final interest rate will only be about 50-75 basis points higher than the current level . Jefferies economist Tom Simons holds a contrarian view, believing that the Fed may not need to raise rates this year and expects policy expectations to shift towards rate cuts within the year.

The bank believes that the real threat at the macro level is not the Fed's short-term actions, but long-term borrowing costs. History shows that when the 10-year Treasury yield rises by more than 100 basis points within 12 months, the price-to-earnings ratio typically contracts by at least one factor (yields have already risen by more than 60 basis points this year).

The deeper crisis lies in the deteriorating fiscal situation: the U.S. national debt has exceeded $40 trillion , and the total debt repayment cost has surged from about $350 billion to more than $1.1 trillion over the past five years, which is comparable to annual defense spending.

The Congressional Budget Office projects that the federal deficit will reach approximately $1.9 trillion in 2026 and increase to approximately $3.1 trillion by 2036. This continued deficit spending and massive issuance of technology debt will put upward pressure on long-term yields, potentially forcing valuations to contract further.

Coping with Inflation and Elections: Safe Havens Revealed by Historical Data

There is no need to panic excessively in the face of sticky inflation and the upcoming midterm elections.

Regarding inflation, the report argues that the current environment is more similar to the late 1980s/early 1990s and mid-2000s than to the "Great Inflation" era of the 1970s. Historical data shows that during those two similar periods, the S&P 500's average annual return was approximately 17% and 15% , respectively, indicating that investors still reaped substantial returns even when inflation was above target.

On the political front, market forecasts indicate that a "divided Congress" is highly likely after the midterm elections (87.5% probability of Democrats controlling the House of Representatives and 47.5% probability of Republicans retaining the Senate), with the most probable outcome being a split government .

Jefferies believes that historical data shows legislative deadlock often reduces policy uncertainty, which is beneficial for risk assets . In the year following the midterm elections, the S&P 500 has an average return of 13% .

Historical data : Since 1978, the S&P 500 has averaged a 13.1% return in the 12 months following midterm elections, with a median return also at 13.1% , both significantly higher than the historical average. The strongest performing sectors after elections are typically technology, consumer discretionary, and materials.

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