By Joseph Adinolfi
A slowdown in the blockbuster pace of earnings growth could throw investors for a loop in 2027
If earnings slow by more than expected, the rally could be in trouble.
Blockbuster earnings growth has helped to power the stock market higher in 2026. In 2027, that engine might stall.
Earnings for the S&P 500 SPX are on track to grow by more than 30% this year, a pace rarely seen outside of the early innings of an economic recovery, according to Capital Economics. Profit growth is expected to moderate slightly next year and slow to 16.3%, although that is still roughly double the long-term average.
But worries that even this slower pace of growth might not materialize has helped to weigh on major indexes like the tech-heavy Nasdaq Composite COMP recently. The Nasdaq finished Friday's session on the cusp of correction territory - defined as a drop of 10% or more from a recent high.
During the early years of the bull market, gains for the top-performing stocks far outpaced the earnings that analysts expected these companies to bring in over the next year. But since the start of 2026, that dynamic has been flipped on its head, as investors have become increasingly unwilling to pay up for the lofty earnings growth that Wall Street analysts are expecting.
The forward price-to-earnings ratio for the S&P 500 has been falling all year and was recently at around 19, about 20% below its peak. For the fast-growing technology sector, multiples have come down even more quickly. Some of tech's heavy hitters - like chip maker Nvidia (NVDA) - are trading at multiples in the midteens, roughly half of the highest levels seen in 2025.
Some have said that this is a solid indication that the stock market isn't in a bubble, since lofty valuations are usually a signpost of a market bubble forming. Others, including Damped Spring Advisors founder Andy Constan, have warned that a bubble isn't forming in stock prices but rather in projected earnings.
To Eddie Ghabour, co-founder of Key Advisors Group, investors have good reason to be skeptical about all of this expected growth. Investment-grade corporate borrowers like Amazon.com (AMZN) rushed to issue debt at the same time as lower-quality borrowers like CoreWeave (CRWV), prompting investors to start to demand a higher premium for holding corporate debt.
"My biggest concern is directly tied to the debt market. With the cost of capital being so high, I don't see how it's possible to meet Wall Street's expectations," Ghabour said.
At some point, companies will likely need to start cutting their guidance regarding how much they expect to spend on the artificial-intelligence build-out. Investors have already seen signs of this, as both Alphabet (GOOGL) (GOOG) and Amazon's latest quarterly spending on data centers came in slightly below expectations.
"We're starting to see some early signs of that, but I would say it's not priced into the market," Ghabour added.
Five of members of the so-called Magnificent Seven group of megacap tech stocks have already reported their third-quarter earnings, which have generally come in below analysts expectations so far.
As a result, the group is on track to report slower quarterly earnings growth than the other 493 companies in the S&P 500 for the first time since this bull market began in late 2022, according to FactSet analyst John Butters.
Another risk: Just five companies - Nvidia, Micron Technology (MU), Broadcom (AVGO), Sandisk (SNDK) and Merck (MRK)- are expected to drive 68% of total earnings growth next year, according to Dow Jones Market Data. Four of those are chip makers, which have seen the biggest boost to their bottom lines from the AI build-out.
John Higgins of Capital Economics said in commentary shared with MarketWatch that he expects the surge in earnings to partly reverse in 2027, undermining the strength of the market in the process.
He cited a few reasons why he believes stocks would be particularly vulnerable in such a scenario. The first is that indexes like the S&P 500 have become heavily weighted toward a handful of megacap companies, most of which have their fortunes tied up with the AI trade. Additionally, the biggest U.S. companies have historically earned much of their revenue abroad, but the ability of purveyors of AI services to monetize demand in markets like China isn't a given.
Finally, the share of corporate profits accruing to owners is already near a record high. Workers likely won't be willing to accept an even smaller share of the pie, Higgins said, particularly as rising costs of living continue to squeeze more low-income consumers.
Mike DeStefano contributed.
-Joseph Adinolfi
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