Corporate Earnings Are Strong Despite Weak Investor Sentiment

Despite widespread frustration with the economy, corporate earnings tell a very different story. Profits rose 12% in 2025, and analysts expect another 23% gain in 2026 followed by 18% in 2027. Forecasts always evolve, but the early results for the second quarter of 2026 are striking: with 27% of companies reporting, earnings are up 38% year over year. Whatever the public mood may be, corporate America is clearly thriving.

 

The disconnect is understandable when you consider what consumers face every day. Gas prices are rising, groceries cost more, and higher interest rates make borrowing increasingly expensive. It’s not an environment that inspires confidence, and the unease shows up clearly in sentiment data: only 29% of investors now describe themselves as bullish, down from 45% just a few weeks ago. Yet even against this backdrop, corporate America continues to generate exceptional profits.

 

 

Data Center Investment Is Broadening S&P 500 Earnings Growth

Data centers are a big part of the story. Massive investment is pouring into new facilities across the country, and that construction boom is creating a wide ripple effect of additional business activity. A few years ago, earnings growth was concentrated in the largest technology companies. Today, the encouraging shift is that most of the S&P 500 is participating.

Whether this momentum lasts is always the million‑dollar question. The economy never sends out a memo announcing the peak.

In the short term, weak investor sentiment often works in the market’s favor. Stocks are less likely to suffer major declines when the prevailing outlook is already pessimistic. The greater risk tends to appear when investors are scrambling to get on board and there are few buyers left. It’s an oversimplification, of course, but sentiment has long served as a reasonably reliable contrary indicator.

Investor Sentiment Can Be a Bullish Signal

If corporate earnings reach $398 or more next year, the market will be trading at roughly 18 times earnings, which is only modestly above the long‑term average. The picture becomes more complicated when looking at dividends: the S&P 500’s dividend yield is near record lows, which would normally signal an expensive market. However, companies are only paying out just 33% of their profits, also a near‑record‑low payout ratio. The weak dividend yield partially reflects a corporate preference for reinvestment and buybacks rather than a lack of underlying earnings power. In that context, the low yield is far less concerning than it first appears.

If all of this feels confusing, you’re in good company. The beauty of focusing on growing dividends at reasonable valuations is that it removes the pressure of trying to predict where the market is headed next. Short‑term movements are always guesswork.

What is striking is how corporate America can thrive while consumers report feeling strained. Yet a recent trip through Denver’s airport told a different story. The crowds were enormous—the busiest I’ve ever seen—which suggests consumers may not be quite as stressed as the sentiment data implies.

Over time, investor sentiment and corporate profits tend to inevitably converge. We cannot know whether sentiment will improve, reflecting stronger earnings, or whether earnings weaken due to consumers spending less. Both investors and consumers want a stronger economy and a better standard of living, and that collective desire ultimately becomes a powerful driver of growth. When those forces align, markets and economic conditions tend to follow.

Observations on the Market No. 421