Fundamental Analysis

1. Main Fundamental Diagnosis

The fundamental picture improved moderately on Monday, primarily because of lower energy pressure and lower long-dated government yields. Brent crude declined 3.4% to $100.34 per barrel, while the U.S. 10-year Treasury yield fell from 5.01% to 4.96%; the 10-year real yield declined from 2.68% to 2.62%. This reduced the pressure that the cost of capital places on equity valuations.

Corporate earnings remain the market’s principal source of support. The latest data based on FactSet indicate a further modest increase in expected S&P 500 third-quarter earnings growth to 28.79%, together with an increase in the full-year earnings-growth forecast to 31.8%. However, an important counter-signal has emerged: the fourth-quarter earnings-growth forecast was reduced to 26.5% from 31.6%.

The macroeconomic picture does not indicate recession. The Federal Reserve Bank of Chicago National Activity Index was −0.04 in August, compared with a revised July reading of +0.08. This is consistent with growth running somewhat below its long-term trend rather than with economic contraction.

2. Fundamental Dashboard

For the forward price-to-earnings ratio, the report intentionally avoids creating false daily precision. There is no new directly comparable official FactSet reading following the latest weekly update. The current forward earnings yield should therefore be viewed as an area around 5.2%, rather than as an exact figure to two decimal places.

3. S&P 500 Earnings

The overall earnings picture remains strong, but an important divergence has emerged between the nearest quarter and the following quarter.

The latest primary FactSet report showed that the third-quarter earnings estimate increased from $88.64 to $89.69 per share, or by 1.2%, during July and August. This is unusually strong: historically, analysts have more often reduced estimates during the first two months of a quarter.

A more recent weekly update based on FactSet data indicates that expected third-quarter earnings growth was raised further from 28.7% to 28.79%, while the full-year 2026 earnings-growth forecast increased from 31.6% to 31.8%.

At the same time, however, the fourth-quarter earnings-growth forecast was reduced from 31.6% to 26.5%. This does not imply a decline in absolute earnings; it represents a deceleration in the expected growth rate. Nevertheless, this is now the indicator that requires the closest monitoring.

4. Fundamental Earnings Breadth

The picture remains reasonably broad.

FactSet previously recorded upward revisions to full-year earnings forecasts in seven of eleven sectors, while expected third-quarter earnings growth extends across all eleven sectors. Five sectors are expected to produce double-digit earnings growth.

Importantly, earnings growth is no longer confined to a small group of the largest technology companies. Estimates indicate that S&P 500 companies outside the seven largest technology groups are also producing exceptionally strong earnings growth, although technology and computing infrastructure continue to contribute disproportionately.

Fundamental breadth therefore remains positive, but the reduction in the fourth-quarter forecast lowers confidence in the continuation of the current pace.

5. Market Valuation

The operational estimate of the current S&P 500 price-to-earnings ratio for September 21 is approximately 23.24, above the 10-year median of roughly 21.

The forward price-to-earnings ratio remains in the region of 19.1–19.2. This is substantially more attractive than the current ratio because the market is pricing significant earnings growth.

However, evaluating the market only against its own earnings is insufficient in the current environment. With the 10-year Treasury yield at 4.96%, competition from bonds remains exceptionally strong.

Absolute equity valuation therefore appears moderately elevated, while relative valuation versus government bonds remains tight.

6. Free Cash Flow

There is no reliable new daily aggregate free-cash-flow yield for the entire S&P 500 for September 21.

The principal question surrounding earnings quality continues to be the exceptionally high level of capital expenditure on computing infrastructure. FactSet recorded references to artificial intelligence on 331 of 493 earnings calls, or 67% of all S&P 500 companies that reported for the second quarter. This was the third consecutive quarter in which the share exceeded 65%.

The current earnings expansion therefore needs to be evaluated not only through accounting earnings but also through the extent to which the investment cycle begins to generate free cash flow.

7. Equities Versus Bonds

This remains the central fundamental valuation measure.

With a forward price-to-earnings ratio around 19.1–19.2, the forward earnings yield is approximately 5.2%.

The U.S. 10-year Treasury yield declined on September 21 to 4.96% from 5.01%.

The spread therefore widened to approximately 0.25–0.30 percentage points.

This is an improvement from Friday, but the gap remains extremely narrow. By comparison, an investor can earn close to a 5% nominal yield from a government bond without assuming corporate equity risk.

A further positive development was the decline in the 10-year real yield from 2.68% to 2.62%.

The discount-rate pressure on equities therefore eased somewhat during the session, but the structural problem of a high cost of capital has not disappeared.

8. Credit Markets

Credit markets remain the calmest component of the fundamental picture.

The latest available Federal Reserve Bank of St. Louis data are for September 18. The investment-grade corporate bond spread declined from 0.78 to 0.77 percentage points, while the high-yield spread narrowed from 2.70 to 2.68 percentage points.

This means that the corporate credit market is not confirming a scenario of systemic financial deterioration.

At present, the problem is the high overall cost of money rather than a sharp increase in the perceived default risk of U.S. corporations.

9. Monetary Conditions

The fundamental backdrop remains restrictive in this area.

Following the September increase, the Federal Reserve target range stands at 3.75–4.00%. On Monday, several central-bank officials indicated that the September move may not be the final increase.

Federal Reserve Bank of St. Louis President Alberto Musalem said that further rate increases would likely be required because inflation is being supported simultaneously by strong demand and recurring supply shocks. He separately stated that, in his assessment, current policy is still not sufficiently restrictive.

Federal Reserve Bank of Chicago President Austan Goolsbee went further. In his assessment, inflation is increasingly being explained not only by tariffs and energy but also by excess demand. He specifically pointed to large-scale investment in artificial-intelligence infrastructure as a potential source of additional aggregate demand.

The decline in oil prices therefore helps the bond market but does not eliminate the risk of further rate increases.

10. Macroeconomy

The Federal Reserve Bank of Chicago National Activity Index for August was −0.04, compared with a revised July reading of +0.08. A zero reading corresponds to the historical trend rate of economic growth; a negative reading indicates growth slightly below average.

This is an important balancing signal. The economy does not appear overheated across all dimensions despite strong consumer spending and labor-market conditions.

Inflation nevertheless remains materially above a comfortable level. The latest Consumer Price Index increased 0.4% month over month and 3.4% year over year in August. Producer prices increased 5.4% year over year, while the energy component of producer prices stood 24.4% above its level a year earlier.

Monday’s decline in oil prices is therefore an important positive development:

This effect cannot yet be regarded as durable. Refined-product markets remain tight, while U.S. diesel prices remain exceptionally elevated.

11. Corporate Developments

The principal corporate theme on Monday remained the artificial-intelligence investment cycle.

Advanced Micro Devices reached a market capitalization of $1 trillion for the first time after its shares rose almost 10%. Reuters associated the move with strengthening expectations regarding the company’s role in artificial-intelligence computing systems and its expanding presence in the server market.

At the same time, the semiconductor index rose 4.3%, while companies associated with artificial intelligence were the primary drivers of the Nasdaq’s record close.

Fundamentally, this confirms that the market is not currently pricing a sharp contraction in the computing-infrastructure investment cycle.

An important distinction remains, however: rising share prices are not themselves new evidence of higher earnings. No new aggregate FactSet earnings upgrade was published specifically on Monday.

12. Fundamental Divergences

First divergence:

Long-dated yields and oil prices declined, while Federal Reserve officials simultaneously became more explicit about the possibility of further monetary tightening.

Short-term relief in financial conditions therefore does not yet represent a change in the monetary-policy regime.

Second divergence:

The third-quarter earnings forecast continues to improve, while the expected fourth-quarter earnings-growth rate has been reduced materially.

This is not yet a deterioration in absolute earnings, but it may be an early signal that the pace of earnings growth is beginning to slow.

Third divergence:

The government cost of capital remains high, while corporate credit spreads continue to narrow.

The credit market is still not confirming a systemic stress scenario.

13. What Matters Today, September 22

There are no major nationwide inflation or employment releases today, so attention shifts primarily to Federal Reserve communication and the government bond market.

At 16:00 Spain time, the Federal Reserve Bank of Richmond Manufacturing Index for September is scheduled for release. The previous reading was 4, while the available market forecast is approximately 5.

A strong reading would reinforce the argument for further rate increases, while a weak reading would somewhat reduce pressure on monetary-tightening expectations.

At 16:05, Federal Reserve Bank of New York President John Williams is scheduled to speak.

At 16:20, Federal Reserve Vice Chair Philip Jefferson is scheduled to speak.

At 19:00, Federal Reserve Bank of Richmond President Thomas Barkin is scheduled to speak.

A U.S. two-year Treasury auction is also scheduled for 19:00 Spain time.

In the current environment, the quality of demand at the auction is particularly relevant: weak demand could renew pressure on the short end of the yield curve and strengthen expectations of further rate increases.

Oil stabilized slightly above $100 in early trading. Brent was approximately in the $100.5–$101 per barrel area following Monday’s 3.4% decline. The market is awaiting possible diplomatic contacts between the United States and Iran.

14. Final Fundamental Assessment

Compared with Friday, the fundamental assessment rises from 52 to 56 out of 100.

The improvement was driven by three factors: Brent declining toward $100, the 10-year Treasury yield moving back below 5%, and further narrowing in corporate credit spreads.

At the same time, the earnings-revision score is reduced from the previous 9 to 7 because the new weekly update shows a material reduction in expected fourth-quarter earnings growth despite continued improvement in the third quarter and for full-year 2026.

The main fundamental diagnosis has therefore changed somewhat.

Previously, the principal risk was almost exclusively the increase in the cost of capital. A second factor has now emerged: it is necessary to determine whether the reduction in the fourth-quarter forecast is an isolated revision or the beginning of a broader deceleration in earnings expectations.

Fundamental Bias for the Current Session

As of the morning of September 22, the fundamental backdrop is assessed as neutral with a moderately positive bias.

Lower oil prices, lower 10-year real yields and narrower credit spreads improve the market backdrop.

The countervailing factor is increasingly restrictive Federal Reserve rhetoric and the possibility of additional rate increases.

Analytical, rather than statistically derived, probabilities:

Advance: 38%
Sideways: 34%
Decline: 28%