The S&P 500 has produced a ~25 percent annualized return for the three successive years ending September 2025, a banner period of performance.
For comparison, there have been only four other occasions where returns have been as strong:
- Pre and post COVID (2019–2021)
- Post-2008 recession recovery (2009–2011)
- Late 1990s run-up to the dot-com bubble (1997–1999)
- Reaganomics-induced tax cuts (1985–1987)
It is no secret that periods of market downturn followed these years of historically high returns, and the current AI revolution is only adding fuel to that fire, taking markets by storm while drawing comparisons to the dot-com bubble of the late 1990s. While there has been a lot of speculation regarding the long-term impact of Artificial Intelligence and how much of the future gains have already been priced in, it is important to remember that technological revolutions are often overestimated in the short term and underestimated in the long term.
The current run-up is eliciting varied reactions across the spectrum of market participants, but there is good data to show that the recent surge is not purely fueled by so-called “animal spirits.” The earnings backdrop is one of the strongest we have seen in market history. While large capitalization companies’ valuations are at or near historical highs, S&P 500 net profit margins (trailing-twelve-month earnings/sales) are up from just under 6 percent in 2000 to 11 percent in 2025. The trailing-twelve-month price/earnings ratio for the S&P 500 stood at 46.5 in December 2001 versus 29.7 as of September 2025, hardly the signs of a brewing tech bubble.
This is not to say that multiple expansion has not played a role in U.S. equity market returns, which have contributed significantly as the chart above shows. However, earnings per share contributions have also been sizeable and in line with annual historical averages by decade.
Specifically for 2024 and 2025, earnings per share have contributed 52 percent and 58 percent of annual returns respectively as opposed to multiple expansion. Expanding multiples are important to contextualize in light of how the S&P 500 index’s major components have evolved over time from capital-intensive businesses like Exxon, General Electric, and Merck to capital-light businesses like Meta, Alphabet and Nvidia.
Given the positive fundamental backdrop for U.S. public equity markets, it comes into clearer view what has been driving the markets during their historic run over the last 10–15 years. While there are continuing tailwinds like AI-based earnings growth and potential interest rate cuts from the Federal Reserve, there are also risk factors that could derail progress in the near term. Policy uncertainty, geopolitical conflict, and other unforeseen risks can create a volatile market environment ripe for pullbacks.
Investors would be wise to remain vigilant, balancing optimism with realism. The lessons of past market cycles remind us that strong returns often preceded periods of correction. However, with earnings growth leading the charge and valuations still below historical extremes, the current rally may have more staying power than skeptics expect, especially if the long-term potential of AI begins to materialize in corporate bottom lines.
