Still Up and To the Right

Federated Hermes’ equity group entered 2026 with a street-high earnings growth forecast, but earnings have exceeded even our lofty expectations. We believe that momentum should continue, pushing our full-year call for S&P 500 earnings to $370, up from our prior projection of $340.

I would like to begin my first market commentary as Federated Hermes Equity CIO by acknowledging my predecessor, Steve Auth, who led this effort with distinction for 26 years. Steve’s tenure helped define not only the quality of our market perspective but also the discipline, thoughtfulness and client focus. While the primary author of this commentary has changed, the investment team behind the insights has not. Readers should expect the same rigorous analysis, long-term perspective and clear-eyed assessment of opportunities and risks that have characterized this publication over many years.

Now on to the business at hand…

Earnings momentum remains strong

As summer turns to fall, our investment focus shifts toward 2027 and beyond. The central message is straightforward. US earnings have been stronger than expected and the drivers of that strength appear durable enough to warrant a meaningful upward revision to our forecasts. The 2026 earnings picture has been driven by the build-out of AI infrastructure and the resilient US economy. An additional unexpected and significant boost has come from a one-time revaluation of Mag Seven investments in private hyperscalers.

Despite coming into 2026 with a street-high earnings growth forecast, results through the first half of the year have exceeded even our lofty expectations. The momentum shows no signs of slowing, with positive earnings revisions for 21 consecutive weeks — the longest stretch since 2021. We think earnings will continue to beat expectations over the coming two quarters, pushing full-year 2026 S&P 500 earnings to $370, up from our prior estimate of $340.

A higher base but a similar growth path

The upgrade to 2026 earnings naturally lifts our expectations for 2027 and 2028. We maintain our forecast for earnings growth of roughly 15% in each of these years, but that growth rate pushes our estimates to $425 in 2027 and $490 in 2028, up from $390 and $450, respectively.

The robust earnings growth is driven by a strong uptick in top-line revenues and the best margin expansion in a generation. Aside from one-offs, margins have risen roughly 9% over the past year, a pace last seen during the 1995–1999 dot-com bull market. We anticipate S&P companies to keep that tempo at least through 2028. Like the current environment, the market in the mid-to-late 90s was absorbing a major technology-driven investment cycle — one that required substantial infrastructure spending before the full range of end-market demand became clear. The historical comparison is not perfect, but useful. If anything, today’s situation is more capital intensive and offers the potential for even greater productivity gains and returns on capital.

As we look to establish a 2028 price target for the S&P, we also take our first look at 2029 earnings. We acknowledge that the equity market is forward-looking and investors at the end of 2028 will price the market based on 2029 expected earnings, which we see coming in at $540. This represents a growth rate of 10%, a modest deceleration from the 15% we forecast for both 2027 and 2028. This projection reflects our desire to be conservative in the face of possible rising depreciation from the infrastructure boom, easing AI bottlenecks as supply comes online, the potential for capital spending growth to slow and a corresponding return to trend economic growth. These factors could become more relevant as capital expenditure (capex) cycles mature.

Holding steady on valuation

On valuation, we continue to view 20x earnings as a reasonable fair-value multiple for the market. Earlier this year, we lowered this call from 22x to 20x to capture the transition among hyperscalers from generally asset-light business models toward asset-heavy structures. That shift matters. More capital intensity argues for some compression in the multiple investors are willing to pay for a given stream of earnings.

At the same time, history suggests that multiples do not usually decline in a straight line as expansions age. They often hold steady, and in some cases reaccelerate, as investors gain confidence in the durability of the cycle. Our 20x call reflects a balance between the two: disciplined enough to acknowledge a more capital-intensive market structure, but not so conservative as to ignore the earnings power and secular growth momentum across large-cap equities.

Price targets and return implications

Combining our earnings estimates with a 20x fair-value multiple produces S&P 500 price targets of roughly 8,500 for 2026, 10,000 for 2027 and 11,000 for 2028. We see meaningful upside of 10% over the coming months, 17.5% in 2027 and another 10% in 2028.

Those figures may be eye-catching, but the annualized return profile is more pedestrian than the headline numbers suggest. The S&P has delivered strong returns over the past decade, with an annualized total return profile in the mid-teens. Against that backdrop, our projected annual return path is consistent with recent history and does not require a heroic assumption about valuation expansion. It simply requires that earnings compound from a higher base.

What we have articulated above is a constructive view on the economy and markets heading into 2027. At the same time, the market is building a new wall of worry around inflation, the possibility of Federal Reserve rate hikes, higher long-term yields, renewed hostilities with Iran and uncertain midterm elections. To be clear, we would likely view a near-term correction as a buying opportunity. As our updated forecasts attest, we anticipate earnings momentum to continue, the capital spending cycle to push forward and the broader economy to remain resilient. From our vantage point, the momentum continues, despite periods of volatility.

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Magnificent Seven: Moniker for seven mega-cap tech-related stocks Amazon, Apple, Google-parent Alphabet, Meta, Microsoft, Nvidia and Tesla.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Large-cap companies may have fewer opportunities to expand the market for their products or services, may focus their competitive efforts on maintaining or expanding their market share, and may be less capable of responding quickly to competitive challenges. The above factors could result in the share price of large-cap companies lagging the overall stock market or growth in the general economy, and, as a result, could have a negative effect on the fund's portfolio, performance and share price.

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