Don't Fight the Profit Cycle! Will U.S. Stocks Break 8,000 Points This Year?

Wall Street may be seriously underestimating the explosive power of the current earnings cycle.

According to FastMoney Desk, Jefferies issued a clear warning in its latest research report on September 14: Do not fight the earnings cycle. Driven by the dual engines of the AI investment frenzy and greater-than-expected corporate earnings upside, the S&P 500 is expected to soar to 8,000 points by the end of this year (2026), and further reach 9,000 points in 2027.

The report believes that despite macro headwinds such as rising 10-year US Treasury yields, sticky inflation, and the midterm elections, corporate fundamentals will remain the core driver of returns.

Jefferies’ core logic is clear and forceful: In a cycle where profit growth is more than twice the historical average, fighting the earnings trend is dangerous.

Furthermore, Jefferies believes that the AI-driven earnings expansion is spreading from the “Magnificent Seven” to the broader market, providing a more solid foundation for the market. Investors should focus on technology, financials, healthcare, and materials—industries with robust earnings revisions and macro support—to seize this rare super cycle of profits amid concerns over valuation contraction.

At the same time, Jefferies also specifically pointed out two major core risks in the report: First, a substantive slowdown in earnings growth among AI-related companies, which would directly undermine the logic of the bull market; Second, a continued rise in the 10-year US Treasury yield, which would pose systemic pressure on equities through the channel of valuation contraction.

Earnings Expectations Severely Underestimated, S&P 500 Eyes 8,000 Points

Jefferies’ base-case forecast is highly aggressive and completely earnings-driven.

The report indicates that the target for the S&P 500 at the end of 2026 is 8,000 points, a projection based on EPS reaching $373 (a 35% year-over-year increase, well above the market consensus of 29%) and a 21.5x price-to-earnings ratio. Looking ahead to 2027, in the base case, the index will reach 9,000 points, based on EPS of $450 (20.8% growth) and a 20.0x P/E ratio.

In the most optimistic “bull market” scenario, the S&P 500 could even break 10,500 points in 2027 (with EPS reaching $500, 34.2% growth); while in the “bear market” scenario with a sharp earnings slowdown, the index may fall back to 6,900 points.

The core logic here is: the market is pricing the S&P 500 for five consecutive years of double-digit, above-average returns, which, since 1970, has only happened during the late stages of the tech boom in 1995–1999.

As long as earnings expectations remain robust, the current valuation level (the weighted model is at the 76th percentile) is manageable.

AI Remains the Core Engine, but Market Breadth Is Substantially Expanding

The most critical point in the report is: The market systematically underestimates the strength of the earnings cycle, and there is still notable upside potential.

Jefferies believes that AI remains at the core of the earnings story, but it is no longer exclusive to a few giants. Data shows that about 46% of the S&P 500’s weight has direct or indirect exposure to AI and data center spending, with these AI-related companies’ earnings expected to soar by 60% this year and moderate to 24% by 2027.

At the same time, market breadth is improving significantly. Although “the Magnificent Seven” have earnings expectations as high as 45% in 2026, the rest of the S&P 500 has also seen a substantial improvement in earnings expectations to around 24%. By 2027, more than 40% of S&P 500 constituents are expected to experience earnings acceleration.

Jefferies argues that this cross-sector rise in earnings and revenue expectations reflects increasingly healthy and diverse fundamentals.

“Magnificent Seven” Facing Rotation Pressure, But Valuations at Multi-Year Lows

Although the “Magnificent Seven” still account for about 33% of the S&P 500’s weight, the environment driving their outperformance is becoming more complicated. Due to record-breaking AI investment, the Magnificent Seven now account for 40% of total S&P 500 capital expenditures (just 16% in June 2023), causing hyperscalers’ free cash flow (FCF) to turn negative, with recovery not expected until 2028. Furthermore, this group’s profit growth is expected to slow from 45% in 2026 to 17% in 2027.

However, the good news for contrarian investors is that the Magnificent Seven’s valuations have undergone a major reset. In absolute terms, the group is now in the 43rd percentile—the lowest level since January 2023; compared to the rest of the S&P 500, relative valuations have plummeted from the 98th percentile a year ago to the 9th percentile now.

Macro Headwinds: 10-Year US Treasury Yield and Fiscal Deficit Are the Biggest Tail Risks

On the Federal Reserve side, the market currently prices in about an 85% chance of a rate hike in September and about an 83% chance of another hike before January 2027, but the terminal rate is only about 50–75 basis points above the current level. Jefferies’ economist Tom Simons holds a contrarian view: he believes the Fed may not need to hike this year and expects policy expectations to shift towards rate cuts by year-end.

The bank believes that the real macro threat is not the Fed’s short-term moves but long-term borrowing costs. History shows that when the 10-year US Treasury yield rises more than 100 basis points within 12 months, the P/E ratio typically contracts by at least one multiple (with yields up more than 60 basis points so far this year).

A deeper crisis lies in the deteriorating fiscal situation: US national debt has surpassed $40 trillion, with total debt servicing costs surging from about $350 billion five years ago to over $1.1 trillion—now comparable to annual defense spending.

The Congressional Budget Office projects that the federal deficit will reach about $1.9 trillion in 2026, and climb to about $3.1 trillion by 2036. This persistent deficit spending and massive tech bond issuance will put upward pressure on long-term yields, potentially forcing valuations to compress further.

Dealing with Inflation and Elections: Historical Data Reveals "Safe Havens"

When facing sticky inflation and the upcoming midterm elections, there’s no need for excessive panic.

On inflation, the report argues that the current environment is more like the late 1980s/early 1990s and the mid-2000s, rather than the "Great Inflation" era of the 1970s. Historical data shows that in these two similar periods, the S&P 500 annualized returns were about 17% and 15% respectively, and investors enjoyed generous returns despite inflation running above target.

On the political side, prediction markets show that after the midterm elections there is a high chance of a "divided Congress" (87.5% probability that the Democrats control the House, 47.5% that the Republicans retain the Senate), with the most likely result being a divided government.

Jefferies believes historical data shows that legislative deadlock tends to reduce policy uncertainty, which benefits risk assets. In the year after midterm elections, the S&P 500’s average return is as high as 13%.

According to historical data: Since 1978, the average 12-month return of the S&P 500 after the midterm elections is 13.1%, with the median also at 13.1%, both significantly higher than the historical average. The strongest post-election performing sectors are typically technology, consumer discretionary, and materials.