An early sneak peek at Wall Street's 2028 outlook 🗓️
Plus a charted review of the macro crosscurrents 🔀
Let’s take a break from what’s happening now or what could happen the rest of this year and consider where things could be farther out.
In his mid-year outlook note published earlier this month, Morgan Stanley’s Mike Wilson offered a glimpse of what he’s expecting in 2028.
“We see 2026 EPS of $339 (23% growth), 2027 EPS of $380 (12% growth), and 2028 EPS of $429 (13% growth),” Wilson wrote (emphasis added).
This is encouraging for investors because earnings are the most important long-term driver of stock prices.
Wilson’s 2028 estimate isn’t too far from the consensus, which calls for earnings to grow 12% year over year to $427 per share.
“Positive operating leverage, AI adoption/’run it lean,’ improving pricing power, and an AI capex cycle that continues to show momentum are key drivers of our constructive view on earnings,” Wilson said.
Admittedly, no one can be expected to nail what’ll happen two to three years from now.
But it’s worth giving it a shot, especially since so much of a stock’s value comes from what the underlying company is expected to earn in the years ahead.
To his credit, Wilson has long been right about the positive operating leverage theme. Three years ago, he predicted that operating leverage — or the degree to which costs move with sales — would help drive profit margin expansion in the years to come. Indeed, profit margins have continued to trend higher through the years.
The AI adoption story is relatively new, but it’s gaining traction.
Companies continue to prove they have pricing power as they have been making their customers help pay for inflation over the years.
And then there’s the AI capex story. The megacap tech hyperscalers continue to commit massive amounts of cash toward building out the AI hardware infrastructure. Barclays analysts expect hyperscaler capex to peak at $1 trillion in 2028 before leveling off.
There’s no guarantee that these will be the leading earnings narratives two years from now. Nevertheless, it’s positive that we have tangible narratives that could realistically be the driving forces of earnings growth.
Decelerating somewhat 🐢
While earnings may continue to grow, the pace of growth isn’t expected to remain as hot.
“S&P 500 net income is expected by consensus to peak in 2026, then decelerate in 2027 and 2028,” RBC’s Lori Calvasina wrote earlier this month. “The Mag 7 appears to have peaked in 2024, with deceleration expected through 2027 and some reacceleration anticipated in 2028. Meanwhile, a broader AI basket is anticipated to see far superior growth in 2026 to both the broader index and Mag 7, followed by deceleration in 2027 and 2028.”
For those who’ve been nervous about growth being a little hot, these forecasts for decelerating growth might come as a relief.
But don’t confuse decelerating growth with slow growth.
Ed Yardeni, founder of Yardeni Research, considered how the current five-year earnings growth estimate compares to historical levels.
“The analysts may be starting to get ‘Buzzed,’ as their expected long-term earnings growth (LTEG) for the S&P 500 rose to 20.2% during the week of May 5,” Yardeni observed. “It rose even higher during the pandemic, when fiscal and monetary policymakers both were slamming on the accelerator. But LTEG now exceeds the 18.6% peak of the 2000 tech bubble.”
So even assuming deceleration in growth, the expected earnings growth rate remains very strong.
The big picture 🖼️
A lot of things could go wrong between now and 2028. And if we’ve learned anything over the past few years, unexpected things happen.
While we don’t know for sure what the next couple of years will look like, we can at least be certain that the publicly traded companies in the stock market will do whatever they can to generate earnings growth.
Time and time again, Corporate America has proven it can adapt and evolve when challenged in its relentless pursuit of profits.
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Related from TKer:
Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐
Higher energy costs, massive labor costs ... and yet record-high profit margins? 🤑
We’re learning more about who’s winning and losing in the AI revolution 🤖
It remains ‘dangerous’ to underestimate Corporate America ⚠️
The wrong question — and the right one — to ask about earnings headwinds 💬
Review of the macro crosscurrents 🔀
📈The stock market climbed last week, with the S&P 500 gaining 0.9% to end at 7,473.47. The index is now down 0.4% from its May 14 closing high of 7,501.24 and up 9.2% year-to-date. For market insights, check out the Stock Market tab at TKer. »
There were several notable data points and macroeconomic developments since our last review:
👎 Consumer vibes are in the dumps. From the University of Michigan’s May Surveys of Consumers: “Consumer sentiment fell for the third straight month as supply disruptions in the Strait of Hormuz continue to boost gasoline prices. Sentiment is now just below the previous historical trough seen in June 2022. The cost of living continues to be a first-order concern, with 57% of consumers spontaneously mentioning that high prices were eroding their personal finances, up from 50% last month. Lower-income consumers and those without college degrees posted particularly strong sentiment declines; these groups are more sensitive to increases in the cost of gas and other essentials. Independents and Republicans saw decreases in sentiment, with both groups reaching their lowest readings of the current presidential administration. Meanwhile, sentiment of Democrats was little changed from last month. Critically, consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run.”
More on inflation: “Year-ahead inflation expectations inched up from 4.7% last month to 4.8% this month. The current reading substantially exceeds the 3.4% reading seen in February 2026 prior to the start of the Iran conflict, along with all 2024 readings. Long-run inflation expectations climbed from 3.5% in April to 3.9% in May, notably higher than the 2.8% to 3.2% range seen in 2024. This month’s increase in long-run expectations reflects sizable jumps among independents and Republicans. For the latter group, long-run inflation expectations are currently more than double their February 2025 reading on a monthly basis.“
For more on consumer sentiment, read: What consumers do > what consumers say 🙊
⛽️ Gas and diesel prices remain elevated. From AAA: “As holiday travelers start hitting the road today in record numbers, Memorial Day weekend gas prices are the highest they’ve been in four years. The national average for a gallon of regular is at $4.56, up 3 cents over last week and $1.38 higher than this time last year. Current prices are close to what drivers were paying 4 years ago, when the national average on Memorial Day was $4.61. With gasoline demand on the rise and the prolonged closure of the Strait of Hormuz, pump prices are likely to remain elevated as the summer travel season gets underway.“
Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.
For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊
💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits declined to 209,000 during the week ending May 16, down from 212,000 the week prior. This metric remains at levels historically associated with economic growth.
Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.782 million during the week ending May 9.
For more on the labor market, read: The next couple of years for the job market could be tough 🫤
🤔 Recent private job growth improved. According to payroll processor ADP, private U.S. employers added 42,500 jobs in the four weeks ending May 2.
For more on the labor market, read: Why mass tech layoffs have little effect on total employment 💾
💳 Card spending data is holding up. From BofA: “Total card spending per HH was up 4.8% y/y in the week ending May 16, according to BAC aggregated credit & debit card data. Ex-gas spending rose by 3.5% y/y. The shift in Mother’s Day likely weighed on spending growth in the week ending May 16. Smoothing through the daily data volatility, the bottom line is that spending remains resilient to the gas price shock.“
Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️
🏠 Mortgage rates jump. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.51%, up from 6.36% last week.
As of Q4, there were 148.7 million housing units in the U.S., of which 87.8 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏡 Home affordability got worse. From the Atlanta Fed: “Home ownership affordability declined from February to March, down by 3.1%. This was the sharpest one-month decline since June of 2023.“
More from the Atlanta Fed: “In March, the median-income household in the US, making $85,828 per year, needed to spend 42% of its income to own the median-priced home ($399,333). … The total monthly cost to own the median-priced home was $3,004 in March, up 3.4% from February. Costs were up by 1.1% from a year ago when mortgage rates were as high as 6.7%. The total monthly payments remained below the previous peak reached in June of last year.“
🏠 Homebuilder sentiment ticks up from low levels. From the NAHB: “Recent increases for long-term interest rates will continue to hold back home buyer demand. Although some regional markets, including parts of the Midwest, are showing relative strength, the housing market continues to face significant affordability challenges.”
🔨 New home construction starts fell. Housing starts declined 2.8% in April to an annualized rate of 1.47 million units, according to the Census Bureau. Building permits rose 5.8% to an annualized rate of 1.44 million units.
😬 This is the stuff pros are worried about. From BofA’s May Global Fund Manager Survey: “Asked what the biggest tail risk is…40% of FMS investors said ‘2nd wave inflation,’ up sharply from 26% last month.20% said ‘geopolitical conflict,’ down from 44% in April (was the #1 tail risk last month).”
Here’s how the biggest “tail risk” has evolved over the years.
For more on risks, read: Three observations about uncertainty in the markets 😟 and Two times when uncertainty seemed low and confidence was high 🌈
🤔 Economic activity survey signals subdued growth. From S&P Global’s May U.S. Flash PMI: “The damaging economic impact from the war in the Middle East is becoming increasingly evident in the business surveys. The ‘flash’ PMI data for May recorded only modest growth of business activity as demand was again squeezed by a further spike in prices and jobs were cut as firms worried over rising costs and the economic outlook.”
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊 and 4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃
📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 4.3% rate in Q2.
For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️
Putting it all together 📋
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been on the rise.
Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation is hovering at near-zero. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐
…you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.
Warren Buffett’s ‘fourth law of motion’ 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.
Proof that ‘past performance is no guarantee of future results’ 📊
Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.
It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.
