Rates are up and so is the S&P 500. Earnings are doing the lifting

On paper this shouldn’t be happening. The Fed hiked on September 16, the 10-year Treasury pushed above 5.1% this week for the first time since 2007, and yet the S&P 500 finished the week up 1.2%, about 0.7% below its August record of 7,798. Higher rates are supposed to hit stocks the hardest when the index is dominated by companies valued on profits that are still years away, and today’s index is exactly that: the ten largest names are close to 40% of it.

The logic behind that worry is the discount rate. A stock is worth the present value of its future profits, and the further out those profits sit, the more a higher rate shrinks them. Adding one point to an 8% discount rate cuts the value of a dollar earned next year by about 1%, a dollar earned in ten years by about 9%, and a dollar earned in twenty years by about 17%. High-growth tech and AI names get most of their value from the far end of that curve, so they act like long-duration bonds. That is why they sold off so hard in 2022.

What’s different now is that the profits are showing up. FactSet expects S&P 500 earnings to grow 29.1% year over year in the third quarter and 32% for all of 2026, led by tech at 63.5%, and by semiconductors at 126% within that. Meanwhile the forward P/E has slipped to 19.2, below its five-year average of 19.8. So the multiple is already absorbing the higher discount rate, and the rally is coming from earnings, not from investors paying more for each dollar of them. The risk is the concentration: without semiconductors, tech earnings growth drops to about 24%. If AI spending slows while the 10-year stays above 5%, there is no cushion left from the multiple, and the same few names that carried the index up would lead it down.

Sources: FactSet Earnings Insight (September 25, 2026), CNBC, Semafor, Pensions & Investments, Pluang.