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Hopes for a US-Iran peace deal wax and wane and with that ebb and flow, the price of crude oil falls or rises. As we have often stated, a price below $80 a barrel for WTI intermediate crude is good for both inflation and the stock market whereas a price above $80 a barrel is apt to be a hurdle for stocks. This is proving to be true in terms of the equity markets daily action. And it is probably one of the most important variables for the intermediate term.
Meanwhile, President Trump is waiting for the US naval blockade and economic sanctions to break down Iran’s IRGC until the Iranian government can no longer pay soldiers — hoping they revolt. But this strategy could prove risky. The IRGC is not a political party. It does not face a midterm election, and it does not live by a Western moral code. This waiting game could become a bigger problem in coming months for President Trump. But for investors, it is simple. It all depends upon the price of oil.
However, while geopolitics is messy and unpredictable, the earnings picture for the S&P 500 index continues to amaze us. The LSEG IBES consensus earnings estimate for 2026 increased $6.06 last week to $359.60 and the 2027 forecast rose $1.11 to $408.83. The consensus 2028 forecast increased $2.50 to $463.70. The S&P Dow Jones consensus earnings estimates were equally impressive with the 2026 estimate rising $2.84 to $357.78 and the 2027 forecasts increasing $2.16 to $405.90. Although we raised our earnings estimates a mere five weeks ago (“Raising Estimates” – July 7, 2026) to $350 and $400.75 for 2026 and 2027, respectively, due to the spectacular performance of second quarter results we are raising them once again. Our new estimates for 2026 and 2027 are $360 and $410 and we would not be surprised if these forecasts also get reviewed after third quarter earnings season.
In our Outlook for 2026 (December 24, 2025) we estimated earnings of $315 for the S&P 500 and indicated that an unchanged PE multiple (which was then 26 times) would equate to an S&P target of 8190. When we raised our earnings forecasts in July we noted that “the current trend in earnings, without multiple expansion, suggests a target of roughly SPX 8350 in December 2026.” We believe this latter target continues to be true, particularly when WTI futures are trading below $80 a barrel.
The equity market is now trading at 21.6 times the IBES 2026 estimate and 19.0 times the 2027 estimate. Furthermore, the forward earnings yield of 5.0% and dividend yield of 1.1% remain competitive even with a 10-year Treasury bond yield of 4.7%. S&P Dow Jones indicates that trailing earnings show a gain of 29.3% YOY. (Earnings expectations were for a 17.6% gain as recently as December.) This 29.3% is 3.6 times better than the 75-year average earnings of 8.1% YOY. Note that forward operating earnings growth is currently forecasted to be 21.4%, which means earnings growth will decelerate but remain impressive. See pages 8 and 9.
Most economic data releases have been favorable for the economy, but last week’s jobs report was not. July’s employment report was a major disappointment with a loss of 23,000 jobs. Plus, previous months were revised down by a total of 103,000 jobs. And despite these losses, the household survey unemployment rate fell from 4.2% to 4.1%. The establishment report and household report are different surveys. The household’s decline in the unemployment rate was due to an estimated 265,000 loss in the civilian labor force, which is the sum of the 178,000 drop in the number of people unemployed, and a decline of 87,000 people employed. Meanwhile, the civilian noninstitutional population increased by 116,000. This combination of a rise in population but decline in the labor force resulted in declines in both the monthly participation rate and employment population ratio. July’s job losses were concentrated in government (53,000), leisure & hospitality (40,000), retail (20,000), and financial (14,000) sectors, according to the establishment report. Job gains were seen in the healthcare and construction sectors. See page 3.
Year-over-year gains or losses in employment in the two BLS surveys are our favorite ways to measure the health of the job market. However, the household survey has become very inconsistent due to annual revisions. The household survey’s year-over-year change in employment jumped significantly in January 2025 and fell dramatically in January 2026 as a result of annual Census Bureau corrections. In the month of January 2026, this adjustment included changes back to April 2020 and the entire revision was incorporated into the January 2026 estimate. The introduction of population controls in this BLS data makes it impossible to compare household survey estimates over time. The 2026 Census Bureau annual adjustment included updated demographic information from the 2020 Census, a departure from the “blended base” methodology introduced in recent years, as well as updated information on net international migration. Although the household data is messy, we find the steady declines seen in this survey — now showing a decline in employment of 0.6% YOY — to be worrisome. See page 3.
The labor force participation ratio fell from 61.5 to 61.4 in July and the employment population ratio declined from 59.0 to 58.9. But more importantly, the longer term trend shows both ratios have been declining since the 2023 highs of 62.8 and 60.4, respectively. While labor participation peaked in 2023, the data shows that the total labor force peaked in 2025. This latter statistic could be the result of several factors, including voluntary deportations of illegal immigrants and aging baby boomers moving into retirement. See page 4.
BLS data on foreign-born and native-born employment shows that foreign civilian population peaked at 50.4 million in March 2025. In the same month, the foreign civilian labor force peaked at 33.7 million, and foreign employment peaked at 32.2 million. The data shows that since March 2025 foreign employment has declined by 1.7 million, and the foreign population has plunged by 23.3 million. In short, this supports our theory of why the labor force peaked in 2025. Note that in July 2026, the unemployment rate for foreign-born workers fell to 3.3%, well below the national average of 4.1%. See page 5.
It is rare for the ISM manufacturing index to outperform the nonmanufacturing index, but that is what occurred in July 2026 for the first time since March 2021. The manufacturing index increased from 53.3 in June to 55.6 in July, while the nonmanufacturing index rose only slightly from 54.0 to 54.1. Also, the ISM nonmanufacturing index for employment fell to 47.4 in July, below the breakeven 50 level, which is a worrisome sign for the service sector. Conversely, the employment index in the manufacturing survey rose to 52.8 in July. The best news in the nonmanufacturing survey was that production jumped from 55.4 to 59.1 in the month and six of nine components rose in the month – although one of those was prices paid. See page 6.
There was little change in our technical indicators this week, but the bias remains bullish. Our view of buying on weakness is unchanged.
Gail Dudack
PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.
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