The past few weeks have been marked by sharp swings in investor sentiment, driven largely by the Iran war and mixed signals from the U.S. labor market. Stepping back from the headlines and looking at companies’ earnings reports, however, shows that markets entered this period from a position of fundamental strength.
Earnings and revenue strength
Corporate profitability in 2025 was robust. As of this past week, all 500 companies in the S&P 500 have reported their earnings for last year. Earnings across U.S. companies grew over 14%, and importantly, this growth was broad based: 10 of 11 major sectors posted profit gains. Revenue growth also accelerated, finishing the year up about 8%.
This combination of widespread revenue expansion and strong earnings reflects a healthy U.S. corporate backdrop heading into 2026. This foundation provides an important buffer as investors assess the potential economic implications of elevated oil prices and broader geopolitical risks.
Today’s valuations in context
A key question for investors is how today’s elevated valuations in U.S. equities will resolve. Valuations, typically measured by the price‑to‑earnings (P/E) ratio, reflect how much investors are willing to pay for each dollar of current and expected earnings. Higher P/E ratios may indicate higher expectations.
Entering 2026, S&P 500 valuations were near historic highs. Historically, elevated valuations have not persisted indefinitely, meaning some degree of reversion to the average is expected over time.
Valuation ratios can normalize in two ways:
- Through price declines, as seen during the dot‑com bust; or
- Through rising earnings, which may contribute to meeting high expectations..
The strong earnings performance at the end of 2025 suggests the latter dynamic. If the economic expansion stays intact, earnings growth may continue to outpace prices in 2026, which could allow valuations to adjust without a decline in market levels.
Of course, geopolitical developments and commodity‑price shocks could influence the pace of this adjustment, but the underlying earnings trajectory remains a key stabilizing force.
How much might valuations normalize?
Consensus expectations call for over 15% earnings growth in 2026. If companies achieve this growth while equity prices remain flat, the S&P 500 forward P/E would decline from over 24x earnings to around 21x earnings — moving closer to its long-term average.
Historical norms could potentially be influenced by earnings strength, but market pullbacks can also play a role in valuation adjustments.
Global comparison on valuations
As explored in a recent Mercer Advisors commentary, international equities outperformed the S&P 500 in 2025, returning 32% versus 18% for U.S. stocks, even though U.S. companies delivered stronger earnings growth.
That relative strength continued into early 2026, before geopolitical tensions in Iran began influencing markets. International equities still trade at roughly a 30% discount to U.S. stocks on an absolute basis.
The long-run view: from voting machine to weighing machine
Warren Buffett popularized a framework (which traces back to Benjamin Graham and David Dodd) that the market can be considered a “voting machine” in the short run and a “weighing machine” in the long run. While short‑term swings often reflect shifts in sentiment, long‑term returns ultimately follow intrinsic value, driven primarily by earnings.
At Mercer Advisors, our investment philosophy aligns with the weighing‑machine perspective. We do not believe in chasing short-term sentiment-driven swings, rather, we focus on long‑term intrinsic value through low‑cost, broadly diversified portfolios that systematically incorporate proven factors such as value and quality — both associated with durable long‑term outperformance. (See this commentary on factor investing for more information.)
Main takeaways
- U.S. corporate fundamentals were strong heading into the current turmoil, and continued earnings growth in 2026 could help elevated valuations normalize even amid geopolitical risks and higher energy prices. Fundamentals provide an important cushion against near-term volatility.
- International equities remain meaningfully cheaper than U.S. stocks, offering a valuation advantage despite recent outperformance.
- Long‑term investing success is supported by low‑cost, diversified portfolios that systematically incorporate factors grounded in fundamentals such as earnings, valuations, and balance‑sheet quality.
Click here for more insights from our CIO and investment team. Not a Mercer Advisors client but interested in more information? Let’s talk.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors.
The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. This information is not intended as a recommendation or solicitation to buy, sell, or hold, any particular security or to engage in any particular investment strategy. Different types of investments involve varying degrees of risk, investments mentioned in this document may not be suitable for all investors. Investments are subject to market risk, including the possible loss of principal. Past performance may not be indicative of future results. Future investment performance cannot be guaranteed. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Portfolio management strategies such as diversification, asset allocation, and rebalancing do not ensure a profit or guarantee against loss. Indices are unmanaged and index returns do not include fees or expenses typically incurred in the management of an investment portfolio. Indices are not available for direct investment.
This content may contain forward looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Chartered Retirement Plan Specialist℠ and CRPS℠ are trademarks or registered service marks of the College for Financial Planning in the United States and/or other countries.
Home » Insights » Market Commentary » The Stock Market Was Strong Entering the Turmoil of the Iran War
The Stock Market Was Strong Entering the Turmoil of the Iran War
David Krakauer, CFA®, CRPS®
Vice President, Portfolio Management
U.S. companies were well positioned heading into the current bout of international turmoil, according to their latest round of quarterly reports
The past few weeks have been marked by sharp swings in investor sentiment, driven largely by the Iran war and mixed signals from the U.S. labor market. Stepping back from the headlines and looking at companies’ earnings reports, however, shows that markets entered this period from a position of fundamental strength.
Earnings and revenue strength
Corporate profitability in 2025 was robust. As of this past week, all 500 companies in the S&P 500 have reported their earnings for last year. Earnings across U.S. companies grew over 14%, and importantly, this growth was broad based: 10 of 11 major sectors posted profit gains. Revenue growth also accelerated, finishing the year up about 8%.
This combination of widespread revenue expansion and strong earnings reflects a healthy U.S. corporate backdrop heading into 2026. This foundation provides an important buffer as investors assess the potential economic implications of elevated oil prices and broader geopolitical risks.
Today’s valuations in context
A key question for investors is how today’s elevated valuations in U.S. equities will resolve. Valuations, typically measured by the price‑to‑earnings (P/E) ratio, reflect how much investors are willing to pay for each dollar of current and expected earnings. Higher P/E ratios may indicate higher expectations.
Entering 2026, S&P 500 valuations were near historic highs. Historically, elevated valuations have not persisted indefinitely, meaning some degree of reversion to the average is expected over time.
Valuation ratios can normalize in two ways:
The strong earnings performance at the end of 2025 suggests the latter dynamic. If the economic expansion stays intact, earnings growth may continue to outpace prices in 2026, which could allow valuations to adjust without a decline in market levels.
Of course, geopolitical developments and commodity‑price shocks could influence the pace of this adjustment, but the underlying earnings trajectory remains a key stabilizing force.
How much might valuations normalize?
Consensus expectations call for over 15% earnings growth in 2026. If companies achieve this growth while equity prices remain flat, the S&P 500 forward P/E would decline from over 24x earnings to around 21x earnings — moving closer to its long-term average.
Historical norms could potentially be influenced by earnings strength, but market pullbacks can also play a role in valuation adjustments.
Global comparison on valuations
As explored in a recent Mercer Advisors commentary, international equities outperformed the S&P 500 in 2025, returning 32% versus 18% for U.S. stocks, even though U.S. companies delivered stronger earnings growth.
That relative strength continued into early 2026, before geopolitical tensions in Iran began influencing markets. International equities still trade at roughly a 30% discount to U.S. stocks on an absolute basis.
The long-run view: from voting machine to weighing machine
Warren Buffett popularized a framework (which traces back to Benjamin Graham and David Dodd) that the market can be considered a “voting machine” in the short run and a “weighing machine” in the long run. While short‑term swings often reflect shifts in sentiment, long‑term returns ultimately follow intrinsic value, driven primarily by earnings.
At Mercer Advisors, our investment philosophy aligns with the weighing‑machine perspective. We do not believe in chasing short-term sentiment-driven swings, rather, we focus on long‑term intrinsic value through low‑cost, broadly diversified portfolios that systematically incorporate proven factors such as value and quality — both associated with durable long‑term outperformance. (See this commentary on factor investing for more information.)
Main takeaways
Click here for more insights from our CIO and investment team. Not a Mercer Advisors client but interested in more information? Let’s talk.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors.
The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. This information is not intended as a recommendation or solicitation to buy, sell, or hold, any particular security or to engage in any particular investment strategy. Different types of investments involve varying degrees of risk, investments mentioned in this document may not be suitable for all investors. Investments are subject to market risk, including the possible loss of principal. Past performance may not be indicative of future results. Future investment performance cannot be guaranteed. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Portfolio management strategies such as diversification, asset allocation, and rebalancing do not ensure a profit or guarantee against loss. Indices are unmanaged and index returns do not include fees or expenses typically incurred in the management of an investment portfolio. Indices are not available for direct investment.
This content may contain forward looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control.
CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Chartered Retirement Plan Specialist℠ and CRPS℠ are trademarks or registered service marks of the College for Financial Planning in the United States and/or other countries.
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