Are you confused by this market?

Published in The Sunday Times on 31st May 2026.

To adapt a well-known phrase, if you aren’t confused by this market, you really don’t understand what’s going on.   

As an investor, there’s an awful lot to be concerned about in the world today.

The oil shock is one of the bigger ones of recent decades, and markets are becoming increasingly sceptical about an imminent return to normality. 

The Fed’s target measure of inflation (PCE) has been above its 2% target for five years straight now. And ISM services prices paid, which has been a strong leading indicator of inflation just hit its highest since 2022. And food price inflation looks likely to rise as we’ve seen fertiliser prices soar.

Rates are under pressure as yields have risen substantially since the Iran conflict began. Long bond yields are at multi year highs in Japan and the UK (that means bond prices have been falling as yields and prices move inversely).  

Yields are at 15 and 18 year highs in Europe and the US. and 10-year yields are now above nominal GDP growth in major developed markets. And sovereign debt levels are historically high, rising and increasingly harder to service as rates ratchet higher.

I could go on. But my enthusiasm for writing this column is beginning to wane.

I’ve heard a variant of these problems rehashed by commentators ad nauseam over the last month. Yet many stock markets are at all-time highs. 

You may have noticed one thing about my laundry list of problems – they all relate to the economy. There isn’t a single mention of any of the things that drive stock markets over time, which is - earnings, including dividends; and the increase or decrease in how much investors are willing to pay for those earnings (i.e. the valuation multiple). 

That’s it. Every share price movement – short or long term – is a function of one of those two things.

And on that front, it’s no wonder stock markets are humming. 

In the US, the blended Q1 2026 yearly earnings growth rate rose to 27%, the highest since Q4 2021. Full-year 2026 EPS is now estimated at a record $332.08, implying ~21% annual growth. And valuation multiples have decreased: the forward P/E stands at 20.7x, down from 22.8x in October 2025, despite the Index at all-time highs. 

So, it’s all about the earnings?

Not quite.  

It’s reasonable to assume that the main driver of return from a company’s stock would be its earnings. This is true, but only in the long term. The relationship between year-over-year changes in annual earnings and the S&P 500 Index for each year is close to zero. The most recent example of this was 2023. The S&P500 returned +26%. And earnings? -12%.

In the US, since 1950, only around 9 years have seen real economic growth (after inflation) contract, essentially recession years. However, in 26 of those years (33% of the time) earnings from the S&P 500 earnings have declined. Earnings and economic growth are therefore far less tightly correlated than one might assume. 

Over this time period, stock returns have been similar whether earnings rise or fall in a given year, with many of the strongest returns occurring during periods of declining earnings. This reflects the market’s forward-looking nature, where expectations—not current fundamentals—drive prices.

So, 2026 could be going either way then despite strong earnings? 

Yes, sort of. In the short term, stock returns are largely random, making outcomes little better than a coin flip. The S&P 500 closed at a record on the 14th May just over the significant level of 7500, representing a 26%+ gain year-over-year.

It delivered a 10.5% total return in April alone — one of its strongest single months in recent memory. That typically occurs as markets bounce off a cyclical low.

The more confusing element lies beneath the surface of the rally. Prior to the Middle East conflict, the equal‑weight S&P 500 was outperforming, reflecting a broadening of market participation as capital rotated away from the capital‑light, high‑duration winners that have been market leaders really since the great financial crisis.

However, that broadening trend has since reversed, with the cap‑weighted index once again pulling ahead, driven by a narrow group of mega‑cap names. Investors are gravitating toward companies with heavy, capital‑intensive asset bases and low obsolescence—particularly those tied to AI infrastructure, compute, and energy. The perceived durability and strategic importance of these businesses has led to a re‑concentration of returns, masking weaker performance across the broader market. 

Is any of this a reason to stay on the sidelines?

If you are looking for reasons not to invest, I’ve a long list to offer. I always have. Is the market more confusing today than a year ago, or two, or five? My recency bias is telling me that it’s never been as confusing. Confusion is not a flaw, it is a feature of stock market investing.

If investing ever feels comfortable and straight forward it will be because I don’t understand what’s going on.  

Source: Data is sourced from Bloomberg as at market close 31st December, returns are based on total indices in local currency terms, unless otherwise stated.

Gary Connolly is Investment Director at Davy. He can be contacted at gary.connolly@davy.ie or on X at @gconno1.