S&P 500 Q3 Earnings Pace at 29% Amid AI Boom

Third-quarter earnings for the S&P 500 are currently on pace to grow 29% year over year, a surge driven largely by the artificial intelligence boom. This earnings acceleration is helping the index stay at or near all-time highs despite inflation running well above 3%, oil prices exceeding $100 a barrel, and long-term interest rates hitting multidecade highs.

The S&P 500 has historically returned roughly 10% annually with dividends reinvested over its decades-long history. While this figure provides a baseline for long-term expectations, it does not indicate the specific path of returns. The index has navigated significant disruptions, including the Great Depression, the stagflation and energy crisis of the 1970s, Black Monday in 1987, the tech bubble, the financial crisis, and the COVID-19 pandemic. Despite these painful bear markets, the index maintained its average annual return of 10%.

Over shorter time frames, stock prices can move in either direction due to inflation reports, jobs data, Federal Reserve policy updates, or unexpected geopolitical events. However, over the longer term, corporate earnings become the primary driver of share prices. Companies that continue to grow revenue, earnings, and cash flows are likely to see their stock prices trend higher over time, even as they experience volatility along the way.

The current rate of earnings growth is unsustainable in the long term, which could lead to below-average returns for U.S. stocks over the next several years. Nevertheless, the long-term outlook for the U.S. economy remains positive. The Vanguard S&P 500 ETF (VOO) offers broad coverage of the U.S. economy with a minimal expense ratio, making it a suitable vehicle for long-term investment.

Predicting near-term market movements is often a fruitless effort. Investors willing to buy and hold for 10 years or longer can ride out market highs and lows, positioning themselves for long-term success. The S&P 500's history suggests that solid total returns are likely for those who maintain a long-term perspective and avoid selling during market drops.