The U.S. stock market has challenges coming from all sides yet continues to rally. At first glance the market may seem disconnected from reality. However, corporate earnings have been the great stabiliser.
May 21, 2026
Kelly Bogdanova Vice President, Portfolio AnalystPortfolio Advisory Group – U.S.
Anyone who has fixated on the recent U.S. stock market rally without paying attention to other news might have assumed that all is right with the world.
The S&P 500 has surged 17 percent since the late March Iran war low and is up 8.6 percent year to date through May 20.
This impressive run has materialised despite a barrage of challenges:
Is the stock market living on another planet?
From our vantage point, the market is grounded where it normally is, on corporate profits. This is why it has defied the challenges thus far:
* Represents Bloomberg Intelligence’s S&P 500 “AI Theme Basket” of stocks mostly in the Information Technology and Communication Services sectors and some stocks from other sectors.
Source – RBC Wealth Management, Bloomberg; data through 5/15/26
The chart compares the year-over-year change in consensus earnings growth forecasts for AI-related stocks in the S&P 500 based on the Bloomberg “AI Theme Basket,” the S&P 500 Index as a whole, and the S&P 500 Index excluding AI-related stocks from January 9 through May 15, 2026. The AI stocks line started at 23.6% and steadily rose to 28.2% by April 24. Thereafter it surged and ended at 65.9% on May 15. The S&P 500 line started at 11.9%, then drifted down a bit, and then drifted up somewhat to 13.7% by April 24. Thereafter it jumped and ended at 27.5% on May 15. The S&P 500 excluding AI stocks line began at 8.1%, then moved down to a low point of 6.0% on March 6, before rebounding to 8.8% on April 24. Thereafter it rose above 12% and ended at 14.4% on May 15.
When AI stocks are excluded from the S&P 500 data, at first glance the earnings growth rate looks much less impressive at 14.4 percent year over year.
Investors should keep in mind, however, this non-AI profit growth rate is above the S&P 500’s long-term average level. And it is rather high on a historical basis when the fastest-growing area of the market is excluded at any given time, especially outside of post-recession rebounds.
Seven of 11 sectors are on pace to grow earnings at double-digit rates in Q1, including Materials at 44 percent and Financials at almost 23 percent year over year.
The S&P 500’s overall 27.6 percent earnings growth rate in Q1 is also impressive compared to most years since 2014. It’s the strongest growth rate outside of the highly unusual post-COVID period, which followed abrupt and deep earnings and economic recessions and included unprecedented fiscal stimulus.
Source – RBC Wealth Management, Bloomberg; Q1 2026 data is preliminary as of 5/20/26 and will be finalised at the end of the reporting season
The chart shows year-over-year S&P 500 earnings growth from Q1 2014 through Q1 2026. It began Q1 2014 at 5.4% and peaked the next quarter at 10.3%. It then moved steadily lower, reaching -6.7% in Q1 2016. It then started to move higher, reaching 25.4% by Q3 2018. It then moved lower, reaching a low point during the entire period of -31.1% in Q2 2020, which was during the COVID-19 earnings recession. It started to improve and then jumped a lot, reaching 96.1% in Q2 2021, during the post-COVID earnings rebound. That was the highest level during the entire period. After that, it tapered off and turned negative in Q4 2022, and then reached a low point of -5.8% in Q2 2023. Since then it has been in positive territory, most of the time between 4.5% and 13.2%, however it has jumped to 27.6% in the most recent Q1 2026.
As long as S&P 500 earnings growth has the potential to rise at a respectable clip over the next 12 months or more, we think the bull market can persist, notwithstanding some turbulence along the way.
A strong relationship between earnings growth and stock market returns has historically played out over time.
When profit growth rises over a number of quarters or years, the stock market tends to remain elevated or push higher. Conversely, when earnings growth falls during periods of economic weakness or recession, the market tends to wobble or decline.
The consensus forecast currently calls for double-digit profit growth in each of the next six quarters, driven by the AI infrastructure boom amid a non-recessionary environment. At this stage, RBC Economics forecasts U.S. GDP growth of 2.1 percent in 2026 and 1.9 percent in 2027.
Risks to this scenario, in our view, largely centre on the Middle East:
While the consensus earnings growth prospects look attractive to us, the chances that shipping traffic through the Strait of Hormuz could remain throttled for additional months are too big to ignore. We would continue to hold U.S. equities up to, but not beyond, a Market Weight allocation.
We want to talk about your financial future.
This publication has been issued by RBC’s Wealth Management international division in the United Kingdom and the Channel Islands which is comprised of an international network of RBC® companies located in these jurisdictions and includes RBC Europe Limited and Royal Bank of Canada (Channel Islands) Limited. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by RBC’s Wealth Management international division.
This publication has been compiled from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, the value of investments and income arising can go down, future returns are not guaranteed, and an investor may not get back the amount originally invested. Countries throughout the world have their own laws regulating the types of securities and other investment products and services which may be offered to their residents, as well as the process for doing so. As a result, any securities or services discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.
This material is prepared for general circulation and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law none of the entities which comprise the international division of RBC Wealth Management nor any of their affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Wealth Management.
Clients of RBC Europe Limited may be entitled to compensation from the UK Financial Services Compensation Scheme (FSCS) if it cannot meet its obligations. This depends on the type of business and the circumstances of the claim. For further information about the compensation provided by the FSCS scheme (including the amounts covered and eligibility to claim) please refer to the FSCS website FSCS.org.uk. Please note only compensation related queries should be directed to the FSCS. Royal Bank of Canada (Channel Islands) Limited is not covered by the UK Financial Services Compensation Scheme. RBC Europe Limited is registered in England and Wales with company number 995939. Its registered office is 100 Bishopsgate, London EC2N 4AA. RBC Europe Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Royal Bank of Canada (Channel Islands) Limited (“the Bank”) is regulated by the Jersey Financial Services Commission in the conduct of deposit taking, fund services and investment business in Jersey. The Bank’s general terms and conditions are updated from time to time and can be found at https://www.rbcwealthmanagement.com/en-eu/terms-and-conditions. Registered office: Gaspé House, 66-72 Esplanade, St. Helier, Jersey JE2 3QT, Channel Islands. Deposits made with Royal Bank of Canada (Channel Islands) Limited in Jersey are not covered by the UK Financial Services Compensation Scheme. Royal Bank of Canada (Channel Islands) Limited is a participant in the Jersey Bank Depositors Compensation Scheme (the Scheme). The Scheme aims to provide protection for eligible depositors of up to £50,000. For further information about the Scheme and to understand your eligibility, please refer to www.jrdca.org.je/jdcs.
Investment services offered by the Bank are not covered by an investor compensation scheme as there is currently no such scheme operating in Jersey, however ‘eligible deposits’ held pursuant to investment services may be protected under the Bank Depositors Compensation Scheme described above – for more information see the Bank’s general terms and conditions. Some of the products that the Bank might recommend to you could be registered overseas and may be covered by a local compensation scheme. Your investment counsellor will provide you with the details of any overseas compensation schemes (where applicable) at the time of making an investment recommendation.
Copies of the latest audited accounts are available upon request from the registered office. ® / ™ Trademark(s) of Royal Bank of Canada. Used under licence.